Geometric Mean Maximization: Expected, Observed, and Simulated Performance

Posted: 21 May 2019

See all articles by Rafael De Santiago

Rafael De Santiago

University of Navarra - IESE Business School

Javier Estrada

IESE Business School

Date Written: July 27, 2011

Abstract

Portfolios can be optimized in a wide variety of ways, depending on the definition of risk and the goal stated. Although the traditional criterion of maximizing a portfolio’s Sharpe ratio remains the standard, many other alternatives exist and are currently used by practitioners. One of those alternatives is to maximize a portfolio’s geometric mean return, which amounts to maximizing the expected growth of the capital invested, or, similarly, the capital expected at the end of a holding period. In this article we assess the expected, observed, and simulated performance of this criterion and we compare it to those of the traditional criterion. We find that geometric mean maximization outperforms Sharpe ratio maximization in more than one dimension, ultimately providing investors with higher growth, much higher upside potential, and rather limited downside potential.

Suggested Citation

De Santiago, Rafael and Estrada, Javier, Geometric Mean Maximization: Expected, Observed, and Simulated Performance (July 27, 2011). https://doi.org/10.3905/joi.2013.22.2.106, Available at SSRN: https://ssrn.com/abstract=1896508 or http://dx.doi.org/10.2139/ssrn.1896508

Rafael De Santiago

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
Spain
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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