1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus

Carolina Fugazza (), Massimo Guidolin and Giovanna Nicodano

No 190, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009a), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to a naive, equally-weighted ones. However, most of the existing results concern the simple case in which an investor has a one-month horizon and mean-variance preferences. In this paper, we examine whether this finding holds for longer investment horizons, when the asset menu includes bonds and real estate beyond stocks and cash, and when the investor is characterized by constant relative risk aversion preferences which are not locally mean-variance for long horizons. Our experiments indicates that power utility investors with horizons of one year and longer would have on average benefited, ex-post, from an optimizing strategy that exploits simple linear predictability in asset returns over the period January 1995 - December 2007. This result is insensitive to the degree of risk aversion, to the number of predictors being included in the forecasting model, and to the deduction of transaction costs from measured portfolio performance.

Keywords: equally weighted portfolios; long investment horizon; real-time strategic asset allocation; public real estate vehicles; ex post performance; predictability; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: G11 L85 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: 1/N and long run optimal portfolios: results for mixed asset menus (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:190

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