The Distribution of the Sample Minimum-Variance Frontier

Raymond Kan () and Daniel Smith ()
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Raymond Kan: Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2008, vol. 54, issue 7, 1364-1380

Abstract: In this paper, we present a finite sample analysis of the sample minimum-variance frontier under the assumption that the returns are independent and multivariate normally distributed. We show that the sample minimum-variance frontier is a highly biased estimator of the population frontier, and we propose an improved estimator of the population frontier. In addition, we provide the exact distribution of the out-of-sample mean and variance of sample minimum-variance portfolios. This allows us to understand the impact of estimation error on the performance of in-sample optimal portfolios.

Keywords: minimum-variance frontier; efficiency set constants; finite sample distribution (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:54:y:2008:i:7:p:1364-1380

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