Mostly Prior-Free Asset Allocation
54 Pages Posted: 4 Feb 2016
Date Written: January 18, 2016
This paper develops a prior-free version of Markowitz (1952)'s efficient portfolio theory that allows the decision maker to express preferences over risk and reward, even though she is unable to express a prior over potentially non-stationary returns. The corresponding optimal allocation strategies are admissible, interior, and exhibit a form of momentum. Empirically, prior-free efficient allocation strategies successfully exploit time-varying risk premium present in historical returns.
Keywords: prior-free portfolios, non-stationary returns, time-varying risk premium
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