Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
August 10, 2012
Columbia Business School Research Paper No. 12/49
Mean-variance investing is all about diversification. Diversification considers assets holistically and exploits the interaction of assets with each other, rather than viewing assets in isolation. Holding a diversified portfolio allows investors to increase expected returns while reducing risks. In practice, mean-variance portfolios that constrain the mean, volatility, and correlation inputs to reduce sampling error have performed much better than unconstrained portfolios. These special cases include equal-weighted, minimum variance, and risk parity portfolios.
Number of Pages in PDF File: 62
Keywords: Diversification, efficient frontier, free lunch, non-participation, risk parity, volatility weighting, estimation risk
JEL Classification: G11, G12
Date posted: August 19, 2012