In Defense of Optimization: The Fallacy of 1/N

Posted: 19 Apr 2010

See all articles by Mark Kritzman

Mark Kritzman

Windham Capital Management

Sebastien Page

State Street Associates

David Turkington

State Street Associates

Date Written: April 16, 2010


Previous research has shown that equally weighted portfolios outperform optimized portfolios, which suggests that optimization adds no value in the absence of informed inputs. This article argues the opposite. With naive inputs, optimized portfolios usually outperform equally weighted portfolios. The ostensible superiority of the 1/N approach arises not from limitations in optimization but, rather, from reliance on rolling short-term samples for estimating expected returns. This approach often yields implausible expectations. By relying on longer-term samples for estimating expected returns or even naively contrived yet plausible assumptions, optimized portfolios outperform equally weighted portfolios out of sample.

Keywords: Performance Measurement and Evaluation, Performance Attribution, Portfolio Management, Asset Allocation

Suggested Citation

Kritzman, Mark and Page, Sebastien and Turkington, David, In Defense of Optimization: The Fallacy of 1/N (April 16, 2010). Financial Analysts Journal, Vol. 66, No. 2, 2010, Available at SSRN:

Mark Kritzman (Contact Author)

Windham Capital Management ( email )

800 Boylston Street
30th Floor
Boston, MA 02199
United States
6174193900 (Phone)
6172365034 (Fax)

Sebastien Page

State Street Associates ( email )

138 Mount Auburn Street
Cambridge, MA 02138
United States
617-234-9462 (Phone)
617-234-9478 (Fax)

David Turkington

State Street Associates ( email )

United States

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