Optimizing the Performance of Sample Mean-Variance Efficient Portfolios

42 Pages Posted: 25 Apr 2011 Last revised: 25 Jul 2012

See all articles by Chris Kirby

Chris Kirby

UNC Charlotte - Belk College of Business

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business

Date Written: July 23, 2012

Abstract

We propose a comprehensive empirical strategy for optimizing the out-of-sample performance of sample mean-variance efficient portfolios. After constructing a sample objective function that accounts for the impact of estimation risk, specification errors, and transaction costs on portfolio performance, we maximize the function with respect to a set of tuning parameters to obtain plug-in estimates of the optimal portfolio weights. The methodology offers considerable flexibility in specifying objectives, constraints, and modeling techniques. Moreover, the resulting portfolios have well-behaved weights, reasonable turnover, and substantially higher Sharpe ratios and certainty-equivalent returns than benchmarks such as the 1/N portfolio and S&P 500 index.

Keywords: active management, conditioning information, estimation risk, mean-variance optimization, portfolio choice, turnover

JEL Classification: G11, G12, C11

Suggested Citation

Kirby, Chris and Ostdiek, Barbara, Optimizing the Performance of Sample Mean-Variance Efficient Portfolios (July 23, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1821284 or http://dx.doi.org/10.2139/ssrn.1821284

Chris Kirby (Contact Author)

UNC Charlotte - Belk College of Business ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-5384 (Phone)
713-348-5251 (Fax)

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