Active Asset Allocation Among a Large Set of Stocks: How Effective is the Parametric Rule?

45 Pages Posted: 1 Sep 2012 Last revised: 29 Mar 2013

See all articles by Huacheng Zhang

Huacheng Zhang

Southwestern University of Finance and Economics - Institute of Financial Studies

Date Written: March 28, 2013

Abstract

In this study we measure the value of active money management. We explore this issue by comprehensively examining the parametric rule proposed by Brandt, Santa-Clara and Valkanov (2009) (the BSV rule) out-of-sample for cross-sectional portfolio choice among a large number of assets and comparing this rule to the mean-variance (MV) rule and the naïve 1/N rule recently advocated by DeMiguel, Garlappi and Uppal (2009). We find that the BSV rule outperforms both the MV and 1/N rules and the outperformance is robust to investment horizons and stock market states. The BSV rule is effective for investors with different preferences or investment opportunities either. The effectiveness of the BSV rule is robust to data screening criteria, estimation periods, portfolio performance evaluation models, the business cycle, and stock market states. Our results suggest that the BSV rule is useful.

Keywords: asset allocation, mean-variance, 1/N rule, portfolio performance, stock characteristics

JEL Classification: G11

Suggested Citation

Zhang, Huacheng, Active Asset Allocation Among a Large Set of Stocks: How Effective is the Parametric Rule? (March 28, 2013). Available at SSRN: https://ssrn.com/abstract=2139878 or http://dx.doi.org/10.2139/ssrn.2139878

Huacheng Zhang (Contact Author)

Southwestern University of Finance and Economics - Institute of Financial Studies ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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