Characteristic-based Mean-variance Portfolio Choice
Author | : Erik Hjalmarsson |
Publisher | : |
Total Pages | : 34 |
Release | : 2009 |
ISBN-10 | : UCR:31210023123597 |
ISBN-13 | : |
Rating | : 4/5 (97 Downloads) |
Download or read book Characteristic-based Mean-variance Portfolio Choice written by Erik Hjalmarsson and published by . This book was released on 2009 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study empirical mean-variance optimization when the portfolio weights are restricted to be direct functions of underlying stock characteristics such as value and momentum. The closed-form solution to the portfolio weights estimator shows that the portfolio problem in this case reduces to a mean-variance analysis of assets with returns given by single-characteristic strategies (e.g., momentum or value). In an empirical application to international stock return indexes, we show that the direct approach to estimating portfolio weights clearly beats a naive regression-based approach that models the conditional mean. However, a portfolio based on equal weights of the single-characteristic strategies performs about as well, and sometimes better, than the direct estimation approach, highlighting again the difficulties in beating the equal-weighted case in mean-variance analysis. The empirical results also highlight the potential for "stock-picking" in international indexes, using characteristics such as value and momentum, with the characteristic-based portfolios obtaining Sharpe ratios approximately three times larger than the world market.