In Defense of Optimization: The Fallacy of 1/N

Articles
  1. Poor
  2. Satisfactory
  3. Good
  4. Very Good
  5. Excellent

Be the first. (0 ratings)

Financial Analysts Journal
March/April 2010 | Vol. 66 | No. 2 | 9 pages
Source: CFA Institute
Mark Kritzman, CFA Sébastien Page, CFA David Turkington, CFA

US$0.00 Member | US$0.00 Candidate | US$15.00 Nonmember

Read

Summary

Previous research has shown that equally weighted portfolios outperform optimized portfolios, which suggests that optimization adds no value in the absence of informed inputs. This article argues the opposite. With naive inputs, optimized portfolios usually outperform equally weighted portfolios. The ostensible superiority of the 1/N approach arises not from limitations in optimization but, rather, from reliance on rolling short-term samples for estimating expected returns. This approach often yields implausible expectations. By relying on longer-term samples for estimating expected returns or even naively contrived yet plausible assumptions, optimized portfolios outperform equally weighted portfolios out of sample.

View more information

Topics
Credits · About the CE Program
1 CE (including 0 SER) Manage CE Credits

People who viewed this page also viewed:

Article
Déjà Vu All Over Again
CFA Institute: CFA Magazine
Article
The Anatomy of Value and Growth Stock Returns
CFA Institute: Financial Analysts Journal
Article
Forecasting Fund Manager Alphas: The Impossible Just Takes Longer
CFA Institute: Financial Analysts Journal

Loading ...