Gains from Markowitz Optimization: Evidence from Re-Optimization of Mutual Fund Holdings

44 Pages Posted: 6 Jan 2019

See all articles by Tony Elavia

Tony Elavia

Mackenzie Investments

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Xu Li

The University of Hong Kong

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: December 7, 2018

Abstract

Prior studies challenge the practical usefulness of Markowitz portfolio optimization in improving the return-risk tradeoff in portfolio management. We approach this question from a unique angle by examining whether one can improve the performance of a large sample of actual mutual fund portfolios by re-optimizing the holdings using simple mean-variance optimization methods. Our analyses produce compelling evidence of the benefits from Markowitz optimization. Simple portfolio optimization improves mutual fund portfolios’ risk-adjusted performance despite noisy expected return estimates inferred from mutual fund portfolio weights. Several alternative optimization strategies, including the risk-parity portfolio, minimum variance portfolio, mean-variance portfolio and Sharpe ratio maximization portfolio all outperform actual mutual fund portfolios in terms of the Sharpe ratio and other risk-adjusted performance measures. Moreover, the results are robust to subsamples partitioned on various dimensions. In contrast to DeMiguel et al. (2009), we find that the 1/N portfolio performs the worst.

Keywords: mutual fund; risk optimization; portfolio management; expected returns.

JEL Classification: G23

Suggested Citation

Elavia, Tony and Kothari, S.P. and Li, Xu and You, Haifeng, Gains from Markowitz Optimization: Evidence from Re-Optimization of Mutual Fund Holdings (December 7, 2018). Available at SSRN: https://ssrn.com/abstract=3305462 or http://dx.doi.org/10.2139/ssrn.3305462

Tony Elavia

Mackenzie Investments ( email )

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Toronto,, ON M5V 3K1
Canada
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HOME PAGE: http://https://www.mackenzieinvestments.com/en/about/leadership-team/tony-elavia

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Xu Li (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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