Investor sentiment and portfolio selection

Chengbo Fu, Gady Jacoby and Yan Wang

Finance Research Letters, 2015, vol. 15, issue C, 266-273

Abstract: We provide a theoretical framework to examine how investor sentiment impacts the mean-variance tradeoff. We derive a sentiment-adjusted Markowitz efficient frontier in which investor sentiment alters the first two moments of asset returns, the minimum-variance frontier as well as the Capital Market Line. Our theoretical results are consistent with empirical findings that heightened sentiment-related noise trading activity drives perceived prices away from fundamental and increases market volatility. A rational investor neglecting the effect of investor sentiment may end up selecting a sub-optimal portfolio.

Keywords: Investor sentiment; Mean-variance theory; Portfolio selection (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:15:y:2015:i:c:p:266-273

DOI: 10.1016/j.frl.2015.11.004

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