Publisher: John Wiley & Sons Inc
E-ISSN: 1540-6288|50|3|301-330
ISSN: 0732-8516
Source: Financial Review, Vol.50, Iss.3, 2015-08, pp. : 301-330
Disclaimer: Any content in publications that violate the sovereignty, the constitution or regulations of the PRC is not accepted or approved by CNPIEC.
Abstract
AbstractI jointly treat two critical issues in the application of mean‐variance portfolios, that is, estimation risk and portfolio instability. I find that theory‐based portfolio strategies, which are known to outperform naive diversification (1/N) in the absence of transaction costs, heavily underperform it under transaction costs. This is because they are highly unstable over time. I propose a generic method to stabilize any given portfolio strategy while maintaining or improving its efficiency. My empirical analysis confirms that the new method leads to stable and efficient portfolios that offer equal or lower turnover than 1/N and larger Sharpe ratio, even under high transaction costs.
Related content
A mean/variance approach to long-term fixed-income portfolio allocation
Quantitative Finance, Vol. 13, Iss. 9, 2013-09 ,pp. :
Mean-Variance Optimal Reinsurance Arrangements
Scandinavian Actuarial Journal, Vol. 2004, Iss. 1, 2004-02 ,pp. :