MARKOWITZ PORTFOLIO AND THE BLUR OF HISTORY

Chi Tim Ng, Yue Shi and Ngai Hang Chan
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Chi Tim Ng: Department of Mathematics, Statistics, and Insurance, Hang Seng University of Hong Kong, Hang Shin Link, Siu Lek Yuen, Shatin, N.T., Hong Kong
Yue Shi: School of Mathematical Science, Beihang University, No. 37 Xueyuan Road, Haidian District, Beijing, P. R. China
Ngai Hang Chan: Department of Statistics, Chinese University of Hong Kong, Shatin, N.T., Hong Kong

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 05, 1-19

Abstract: It is shown in this paper that when the true mean return vector is replaced by the inferred mean vector obtained indirectly from factor model and arbitrage pricing theory, its impact on the resulting optimal portfolio is insignificant. To achieve this goal, several assumptions are imposed: (i) the asset returns are generated from a factor model, (ii) the number of assets goes to infinity, and (iii) there is no asymptotic arbitrage opportunities. Issues related to the efficiency of the estimated optimal portfolio for high-frequency data are discussed. The portfolio constructed using the sample mean vector and using the inferred mean vector from arbitrage pricing theory are compared.

Keywords: Arbitrage pricing theory; blur of history; factor model; Markowitz portfolio (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024920500302

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