1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus

Federal Reserve Bank of St, Louis, Working Paper No. 2010-003A

47 Pages Posted: 9 Jan 2010 Last revised: 19 May 2014

See all articles by Carolina Fugazza

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Center for Research on Pensions and Welfare Policies

Massimo Guidolin

Bocconi University - Department of Finance

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

Date Written: January 8, 2010

Abstract

Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences. In this paper, we examine whether their result holds for longer investment horizons, when the asset menu includes bonds and real estate beyond stocks and cash, and when the investor is characterized by constant relative risk aversion preferences which are not locally mean-variance for long horizons. Our experiments indicates that power utility investors with horizons of one year and longer would have on average benefited, ex-post, from an optimizing strategy that exploits simple linear predictability in asset returns over the period January 1995 - December 2007. This result is insensitive to the degree of risk aversion, to the number of predictors being included in the forecasting model, and to the deduction of transaction costs from measured portfolio performance.

Keywords: equally weighted portfolios, long investment horizon, real-time strategic asset allocation, public real estate vehicles, ex post performance, predictability, parameter uncertainty

JEL Classification: G11, L85

Suggested Citation

Fugazza, Carolina and Guidolin, Massimo and Nicodano, Giovanna, 1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus (January 8, 2010). Federal Reserve Bank of St, Louis, Working Paper No. 2010-003A, Available at SSRN: https://ssrn.com/abstract=1533537 or http://dx.doi.org/10.2139/ssrn.1533537

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Center for Research on Pensions and Welfare Policies ( email )

Via Real Collegio, 30
Moncalieri, Turin - Piedmont 10124
Italy

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

EGCI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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