What is the Opportunity Cost of Mean-Variance Investment Strategies?

Yusif Simaan
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Yusif Simaan: Graduate School of Business Administration, Fordham University, 113 West 60th Street, New York, New York 10023

Management Science, 1993, vol. 39, issue 5, 578-587

Abstract: An analytical framework is set up to evaluate the foregone opportunity cost of mean-variance investment strategies. A parametric structure of the joint distribution of security returns, for which mean-variance investment strategy is suboptimal, is specified. For all constant absolute risk-aversion investors, the optimal strategy, its corresponding mean-variance alternative, and the foregone opportunity cost of mean-variance investment strategy are analytically derived and operationalized empirically. When the investor's opportunity set includes the riskless asset, the premium to replace the mean-variance investment strategy by its optimal one does not exceed 0.05 cents on an invested dollar regardless of the investor's risk aversion. When the riskless asset is denied, the opportunity costs of mean-variance investment strategies increase with the degree of risk aversion.

Keywords: finance; portfolio selection; mean-variance analysis; Pearson type three distribution (search for similar items in EconPapers)
Date: 1993
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