The Opportunity Cost of a Mean-Variance Efficient Choice

Bernard V Tew, Donald W Reid and Craig A Witt

The Financial Review, 1991, vol. 26, issue 1, 31-43

Abstract: The mean-variance criterion is one of the most frequently used methods for selecting investment portfolios. Yet, because it is an approximation of an investor's maximum expected utility choice, some theoreticians and practitioners have criticized the approach. This paper examines the investment loss that different investors experience by accepting a mean-variance efficient portfolio. Simulated security returns with extreme distributional characteristics are used to determine the extent of an investor's loss. The results indicate that even under very unreasonable investment distributional assumptions, an investor's loss by accepting a mean-variance efficient choice rarely exceeds a small fraction of one percent per invested dollar. Copyright 1991 by MIT Press.

Date: 1991
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