On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results

Michael J Best and Robert R Grauer

The Review of Financial Studies, 1991, vol. 4, issue 2, 315-42

Abstract: This paper investigates the sensitivity of mean-variance(MV)-efficient portfolios to changes in the means of individual assets. When only a budget constraint is imposed on the investment problem, the analytical results indicate that an MV-efficient portfolio's weights, mean, and variance can be extremely sensitive to changes in asset means. When nonnegativity constraints are also imposed on the problem, the computational results confirm that a positively weighted MV-efficient portfolio's weights are extremely sensitive to changes in asset means, but the portfolio's returns are not. A surprisingly small increase in the mean of just one asset drives half the securities from the portfolio. Yet the portfolio's expected return and standard deviation are virtually unchanged. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1991
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