A Sharpe Ratio Neutral Prior for Bayesian Portfolio Selection
30 Pages Posted: 24 Mar 2017 Last revised: 19 Jul 2018
Date Written: March 23, 2017
Abstract
The standard noninformative prior for Bayesian portfolio selection implies strong and unreasonable prior information about the achievable Sharpe ratio. This has critical implications for portfolio selection. We develop a reparametrization that allows to specify a prior which is flat in the achievable Sharpe ratio. Applications suggest that Bayesian portfolio selection with the Sharpe ratio neutral prior does not encounter the usual pathologies of unconstrained mean-variance optimization.
Keywords: Portfolio Optimization, Bayesian Econometrics, Asset Management, Asset Pricing
JEL Classification: C11, C58, G11
Suggested Citation: Suggested Citation