Equally Weighted vs. Long-Run Optimal Portfolios
Forthcoming, European Financial Management
Posted: 28 Feb 2014
Date Written: February 2014
Abstract
Out-of-sample experiments cast doubt on the ability of portfolio optimizing strategies to outperform equally weighted portfolios, when investors have a 1-month time horizon. This paper examines whether this finding holds for longer investment horizons over which the optimizing strategy exploits linear predictability in returns. Our experiments indicate that investors with longer horizons on average would have benefited, ex post, from an optimizing strategy over the period 1995–2009. We analyze performance sensitivity to investor risk aversion, to the number of predictors included in the forecasting model and to the deduction of transaction costs from portfolio performance.
Keywords: asset allocation, return predictability, parameter uncertainty, REITs, portfolio performance
JEL Classification: G11, L85.
Suggested Citation: Suggested Citation