C. Yan
Mean-Variance versus Naïve Diversification: The Role of Mispricing
Yan, C.; Zhang, H.
Authors
H. Zhang
Abstract
We compare the equal-weight naïve 1/N portfolio with mean-variance strategies from the perspective of mispricing (alpha) and provide three new findings. First, we analytically show that the 1/N rule approaches the ex ante mean-variance efficient portfolio in the absence of mispricing. With mispricings, mean-variance strategies can overcome the difficulty brought by the imprecise parameter estimates and outperform 1/N by exploiting the mispricing. Second, with mispricings the 1/N rule is unlikely to outperform mean-variance strategies even when N is large, since mean-variance strategies have more opportunities to exploit mispricings. Third, minimum-variance strategies do not exploit mispricings and underperform the 1/N rule.
Citation
Yan, C., & Zhang, H. (2017). Mean-Variance versus Naïve Diversification: The Role of Mispricing. Journal of International Financial Markets, Institutions and Money, 48, 61-81. https://doi.org/10.1016/j.intfin.2016.12.005
Journal Article Type | Article |
---|---|
Acceptance Date | Dec 21, 2016 |
Online Publication Date | Dec 29, 2016 |
Publication Date | May 1, 2017 |
Deposit Date | Jan 11, 2017 |
Publicly Available Date | Dec 29, 2017 |
Journal | Journal of International Financial Markets, Institutions and Money |
Print ISSN | 1042-4431 |
Publisher | Elsevier |
Peer Reviewed | Peer Reviewed |
Volume | 48 |
Pages | 61-81 |
DOI | https://doi.org/10.1016/j.intfin.2016.12.005 |
Public URL | https://durham-repository.worktribe.com/output/1388799 |
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http://creativecommons.org/licenses/by-nc-nd/4.0/
Copyright Statement
© 2017. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
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