Using Industry Momentum to Improve Portfolio Performance
Braziliann School of Public and Business Administration
University of Ulm - Department of Mathematics and Economics; European Business School (EBS) Wiesbaden - Department of Finance, Accounting & Real Estate
European Business School (EBS)
December 7, 2011
Journal of Banking & Finance, Vol. 36, pp. 1414-1423. 2012
Minimum-variance portfolios, which ignore the mean and focus on the (co)variances of asset returns, outperform mean-variance approaches in out-of-sample tests. Despite these promising results, minimum-variance policies fail to deliver a superior performance compared with the simple 1/N rule. In this paper, we propose a parametric portfolio policy that uses industry return momentum to improve portfolio performance. Our portfolio policies outperform a broad selection of established portfolio strategies in terms of Sharpe ratio and certainty equivalent returns. The proposed policies are particularly suitable for investors because portfolio turnover is only moderately increased compared to standard minimum-variance portfolios.
Number of Pages in PDF File: 30
Keywords: Portfolio Optimization, Minimum-Variance Portfolios, Industry Momentum
JEL Classification: G11, G12Accepted Paper Series
Date posted: February 8, 2011 ; Last revised: March 22, 2012
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