Portfolio Selection: How to Construct and Use the Critical-Implied Reference Portfolio

11 Pages Posted: 9 Oct 2005

See all articles by Craig W. French

Craig W. French

Portfolio Engineering Laboratory

Date Written: September 14, 2005

Abstract

I employ mean variance space and introduce a diversified benchmark called the Critical Implied Reference ("CIR") portfolio, which is superior to portfolios on the efficient frontier as a reference portfolio since, whereas the latter may be optimal in the mathematical sense, they are often highly concentrated and not well-diversified, making them less than appealing for benchmarking purposes. I also present the concept of Diversified Opportunity Set analysis in order to show that the CIR portfolio will generally dominate naively-constructed, equal-weighted reference portfolios in mean-variance space.

Keywords: portfolio selection, hedge fund, Markowitz

JEL Classification: G11

Suggested Citation

French, Craig W., Portfolio Selection: How to Construct and Use the Critical-Implied Reference Portfolio (September 14, 2005). Available at SSRN: https://ssrn.com/abstract=813131 or http://dx.doi.org/10.2139/ssrn.813131

Craig W. French (Contact Author)

Portfolio Engineering Laboratory ( email )

New Hope, PA 18977
United States
2679827565 (Phone)
18938 (Fax)

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