Arithmetic and Continuous Return Mean-Variance Efficient Frontiers

Posted: 10 Jan 2011

See all articles by Robert Ferguson

Robert Ferguson

AnswersToGo

Dean Leistikow

Fordham University - Finance Area

Susana Yu

Iona College

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2008

Abstract

The arithmetic mean-variance frontier shows that taking more risk is always rewarded with higher expected arithmetic return. This article shows that there is a danger from being too aggressive that is not reflected in the arithmetic return mean-variance frontier because expected arithmetic return is a poor indicator of long-term arithmetic return. Since long-term arithmetic return is equivalent to long-term average continuous return, the relevant mean-variance frontier replaces expected arithmetic return with expected continuous return. The article shows that, for the continuous return mean-variance frontier, expected return initially rises, then declines and becomes negative as risk increases.

Keywords: Modern Portfolio Theory

Suggested Citation

Ferguson, Robert and Leistikow, Dean and Yu, Susana, Arithmetic and Continuous Return Mean-Variance Efficient Frontiers (January 15, 2008). Journal of Investing, Vol. 18, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1737539

Robert Ferguson

AnswersToGo ( email )

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Dean Leistikow

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States

Susana Yu (Contact Author)

Iona College ( email )

715 North Avenue
New Rochelle, NY 10801
United States

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