Performance of portfolios optimized with estimation error

Management Science

Volumn 53, Issue 6, 2007, Pages 1005-1015

  Siegel, Andrew F ^a   Woodgate, Artemiza ^b  

^a UNIVERSITY OF WASHINGTON   (United States)

^b Russell Investment Group   (United States)

Author keywords

Capital market line adjustment; Estimation error; Investments; Portfolio performance; Statistical noise correction

Indexed keywords

CAPITAL MARKET LINE ADJUSTMENT; RESOURCE; STATISTICAL NOISE CORRECTION;

APPROXIMATION THEORY; ASYMPTOTIC ANALYSIS; BAYESIAN NETWORKS; ECONOMIC ANALYSIS; INVESTMENTS; OPTIMIZATION; RISK ASSESSMENT; ROBUST CONTROL; STATISTICAL METHODS;

ERROR ANALYSIS;

EID: 38549133525     PISSN: 00251909     EISSN: 15265501     Source Type: Journal    
DOI: 10.1287/mnsc.1060.0664     Document Type: Article

References (31)

1. Barberis, N. 2000. Investing for the long run when returns are predictable. J. Finance 55 225-264.
2. Basak, G. K., R. Jagannathan, T. Ma. 2004. Assessing the risk in sample minimum risk portfolios. Working Paper 10447, National Bureau of Economic Research, Cambridge, MA.
3. Bawa, V. S., S. J. Brown, R. W. Klein. 1979. Estimation Risk and Optimal Portfolio Choice. North-Holland, Amsterdam, The Netherlands.
4. Britten-Jones, M. 1999. The sampling error in estimates of meanvariance efficient portfolio weights. J. Finance 54 655-671.
5. Chopra, V. K., W. T. Ziemba. 1993. The effects of errors in means, variances and covariances on optimal portfolio choice. J. Portfolio Management 19(Winter) 6-11.
6. Clarkson, P., J. Guedes, R. Thompson. 1996. On the diversification, observability and measurement of estimation risk. J. Financial Quant. Anal. 31 69-84.
7. Dhingra, H. L. 1980. Effects of estimation risk on efficient portfolios: A Monte Carlo simulation study. J. Bus. Finance Accounting 7 277-295.
8. Eun, C. S., B. G. Resnick. 1994. International diversification of investment portfolios: US and Japanese perspectives. Management Sci. 40 140-161.
9. Fomby, T. B., S. K. Samanta. 1991. Application of Stein rules to combination forecasting. J. Bus. Econom. Statist. 9 391-407.
10. Frankfurter, G. M., H. E. Phillips, J. P. Seagle. 1971. Portfolio selection: The effects of uncertain means, variances and covariances. J. Financial Quant. Anal. 6 1251-1262.
11. Frost, P. A., J. E. Savarino. 1986a. An empirical Bayes approach to efficient portfolio selection. J. Financial Quant. Anal. 21 293-305.
12. Frost, P. A., J. E. Savarino. 1986b. Portfolio size and estimation risk; the problem that results from estimation error in portfolio selection is even more severe than has been previously suggested. J. Portfolio Management 12(Summer) 60-64.
13. Green, R. C., B. Hollifield. 1992. When will mean-variance portfolios be well diversified? J. Finance 47 1785-1809.
14. Haff, L. R. 1979. An identity for the Wishart distribution with applications. J. Multivariate Anal. 9 531-544.
15. Jobson, J. D., B. Korkie. 1980. Estimation for Markowitz efficient portfolios. J. Amer. Statist. Assoc. 75 544-554.
16. Jorion, P. 1985. International portfolio diversification with estimation risk. J. Bus. 58 259-278.
17. Jorion, P. 1986. Bayes-Stein estimation for portfolio analysis. J. Financial Quant. Anal. 21 279-292.
18. Jorion, P. 1991. Bayesian and CAPM estimators of the means: Implications for portfolio selection. J. Banking Finance 15 717-727.
19. Kan, R., G. Zhou. 2005. Optimal estimation for economic gains: Portfolio choice with parameter uncertainty. Working paper, University of Toronto, Toronto, Canada, and Washington University, St. Louis, MO.
20. Klein, R. W., V. S. Bawa. 1976. The effect of estimation risk on optimal portfolio choice. J. Financial Econom. 3 215-231.
21. Kotz, S., N. L. Johnson, C. B. Read. 1988. Encyclopedia of Statistical Sciences, Vol. 8. Wiley, New York, 646-647.
22. Lewellen, J., J. Shanken. 2002. Learning, asset pricing tests and market efficiency. J. Finance 57 1113-1145.
23. MacLean, L., M. E. Foster, W. T. Ziemba. 2004. Empirical Bayes estimation with dynamic portfolio models. Working paper, University of British Columbia, British Columbia, Canada.
24. Markowitz, H. 1952. Portfolio selection. J. Finance 7 77-91.
25. Merton, R. C. 1980. On estimating the expected return on the market. J. Financial Econom. 8 323-361.
26. Michaud, R. 0.1998. Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation. Harvard Business School Press, Boston, MA.
27. Muller, P. 1993. Empirical tests of biases in equity portfolio optimization. S. A. Zenios, ed. Financial Optimization. Cambridge University Press, Cambridge, UK.
28. Pástor, L., R. F. Stambaugh. 2000. Comparing asset pricing models: An investment perspective. J. Financial Econom. 56 335-381.
29. Seber, G. A. F. 1984. Multivariate Observations. Wiley, New York.
30. ter Horst, J. R., F. A. de Roon, B. J. M. Werker. 2002. Incorporating estimation risk in portfolio choice. Working paper, Tilburg University, Tilburg, The Netherlands.
31. Tu, J., G. Zhou. 2004. Data-generating process uncertainty: What difference does it make in portfolio decisions? J. Financial Econom. 72 385-421.