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Using Industry Momentum to Improve Portfolio PerformancePatrick BehrBraziliann School of Public and Business Administration Andre GuettlerUniversity of Ulm - Department of Mathematics and Economics; European Business School (EBS) Wiesbaden - Department of Finance, Accounting & Real Estate Fabian TrübenbachEuropean Business School (EBS) December 7, 2011 Journal of Banking & Finance, Vol. 36, pp. 1414-1423. 2012 Abstract: 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, G12 Accepted Paper SeriesDate posted: February 8, 2011 ; Last revised: March 22, 2012Suggested CitationContact Information
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