Market Volatility, Optimal Portfolios and Naive Asset Allocations

Ca Foscari University of Venice Working Paper No. 08/WP/2012

18 Pages Posted: 10 Jul 2012 Last revised: 3 Oct 2012

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: June 15, 2012

Abstract

This paper investigates the impact of a financial turmoil on the performances of traditional, and naive, asset allocation strategies. We compare over a long time span (lasting for the last 60 years) the 1/N portfolio with mean-variance optimal portfolio strategies. Our analyses consider several datasets, and different approaches for the estimation of expected returns, starting from simple historical moments to the use of predictable variables, mean reversion or both. By employing rolling estimation approaches and robust Sharpe ratio testing we determine if during different market volatility states calibrated portfolios perform better than optimally determined allocations.

Keywords: mean reversion, strategy preference, 1/N, predictability, testing Sharpe equivalence

JEL Classification: G11

Suggested Citation

Caporin, Massimiliano and Pelizzon, Loriana, Market Volatility, Optimal Portfolios and Naive Asset Allocations (June 15, 2012). Ca Foscari University of Venice Working Paper No. 08/WP/2012, Available at SSRN: https://ssrn.com/abstract=2103074 or http://dx.doi.org/10.2139/ssrn.2103074

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

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