Mean-Variance versus 1/N: What if we can forecast? (Updated 22nd December 2013)

David Allen, Colin Lizieri and Stephen Satchell

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Mean-variance optimisation has been roundly criticised by financial economists and practitioners alike, leading many to advocate a simple 1/N weighting heuristic. We investigate the performance of the Markowitz technique conditional on investor forecasting ability. Using a novel analytical approach, we demonstrate that investors with a modicum of forecasting ability can employ mean-variance to significantly increase their ex ante utility, outperforming the 1/N rule.

Keywords: Portfolio Choice; Investment Decisions; Financial Forecasting and Simulation (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2012-10-19
New Economics Papers: this item is included in nep-for and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1244

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