Portfolio Selection: How to Construct and Use the Critical-Implied Reference Portfolio
11 Pages Posted: 9 Oct 2005
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: Suggested Citation