Challenging the Efficient Frontier Portfolio

Abstract:     
We challenge the hypothesis of the efficient frontier portfolios by using network approach. In a small-world network interacting agents decide upon the portfolio selection solely upon past returns. Simulation results indicate that agents are capable of forming the efficient frontier, whereas portfolios from the efficient frontier are also the most consistently selected. Introduction of suspicious agents who may depart from seemingly the most promising portfolios resulted in the larger risk that these agents were ready to bear that also significantly attenuated the level of consistence of choices.

Number of Pages in PDF File: 30

Keywords: Portfolio analysis, Small world network, Multiperiod asset allocation, Enforcement learning, Suspiciousness, Consistency, CAPM.

JEL Classification: C73, D83, G11

working papers series