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Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy

David Ardia and Kris Boudt

Cahiers de recherche from CIRPEE

Abstract: We propose to compute the implied expected returns from several candidate mean-variance efficient portfolios, exploiting the fundamental relation between the expected returns, covariance matrix and the corresponding set of mean-variance efficient portfolios. Over the 1987-2012 period and for the universe of S&P 100 stocks, we find that a mean-variance efficient investor would have been willing to pay between a 1.7% and 4.2% management fee to switch from mean-variance investing using implied expected returns from the market capitalization weighted portfolio to mean-variance investing using the implied expected returns from the equal-risk-contribution portfolio.

Keywords: Implied expected return; mean-variance; model selection; portfolio allocation; reverse engineering; risk-based allocation (search for similar items in EconPapers)
JEL-codes: C13 C31 G11 G12 (search for similar items in EconPapers)
Date: 2013
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