1/N and long run optimal portfolios: results for mixed asset menus

Carolina Fugazza (), Massimo Guidolin and Giovanna Nicodano

No 2010-003, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences. In this paper, we examine whether their result holds for longer investment horizons, when the asset menu includes bonds and real estate beyond stocks and cash, and when the investor is characterized by constant relative risk aversion preferences which are not locally mean-variance for long horizons. Our experiments indicates that power utility investors with horizons of one year and longer would have on average benefited, ex-post, from an optimizing strategy that exploits simple linear predictability in asset returns over the period January 1995 - December 2007. This result is insensitive to the degree of risk aversion, to the number of predictors being included in the forecasting model, and to the deduction of transaction costs from measured portfolio performance.

Keywords: Econometric models; Asset pricing; Rate of return (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://research.stlouisfed.org/wp/2010/2010-003.pdf (application/pdf)

Related works:
Working Paper: 1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2010-003

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().