Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy

21 Pages Posted: 12 Feb 2013 Last revised: 10 Aug 2018

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Date Written: February 23, 2015


Implied expected returns are the expected returns for which a supposedly mean-variance efficient portfolio is effectively efficient given a covariance matrix. We analyze the statistical properties of monthly implied expected return estimates and study their sensitivity to the choice of a mean-variance efficient portfolio proxy. Over the period January 1984 to December 2012 and for the universe of S&P 100 stocks we find that the largest gains are in terms of stability of the return forecasts. The use of a maximum diversification or equal-risk-contribution portfolio as proxy reduces significantly the cross-section and time series dispersion in the implied expected return forecasts and leads to a small improvement in forecast precision, compared to using a market capitalization, fundamental value or equal weighting scheme. For all proxies considered, the implied expected return estimates outperform the time series model based forecasts in terms of stability and forecast precision.

Keywords: Implied expected return, mean-variance, portfolio allocation, reverse engineering, risk-based allocation

JEL Classification: G11, G12, C13, C31

Suggested Citation

Ardia, David and Boudt, Kris, Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy (February 23, 2015). Journal of Portfolio Management, Vol. 41, Number 4, pp.68-81, July 2015, Available at SSRN: or

David Ardia (Contact Author)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000

Vrije Universiteit Brussel ( email )

Pleinlaan 2
Brussels, 1050

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV

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