Normative Portfolio Theory

Forthcoming International Review of Financial Analysis

Posted: 12 Sep 2014 Last revised: 9 Jul 2017

See all articles by Yufen Fu

Yufen Fu

Tunghai University

George Blazenko

Simon Fraser University (SFU) - Finance Area

Date Written: August 1, 2015

Abstract

In this paper, we correct the adverse impact of estimation risk on both portfolio weights and performance with two new equity allocation methods we implement with estimation-free and estimated ex-ante returns. Portfolios with estimation-free ex-ante returns and systematic-to-unsystematic risk weights have statistically higher Sharpe ratios than both similar portfolios with estimated ex-ante returns and 1/N’th portfolios. Optimal portfolio methods with well-behaved weights guide investors in a way not hitherto possible (normative portfolio theory).

Keywords: Equity Allocation, Estimation Risk, Ex Ante Returns, Sharpe Ratio

JEL Classification: G14, G15

Suggested Citation

Fu, Yufen and Blazenko, George W., Normative Portfolio Theory (August 1, 2015). Forthcoming International Review of Financial Analysis, Available at SSRN: https://ssrn.com/abstract=2494418 or http://dx.doi.org/10.2139/ssrn.2494418

Yufen Fu

Tunghai University ( email )

Taichung 407
Taiwan

George W. Blazenko (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada

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