Optimum Allocation of Weights to Assets in a Portfolio: The Case of Nominal Annualisation Versus Effective Annualisation of Returns

31 Pages Posted: 1 May 2019

See all articles by Arun J. Prakash

Arun J. Prakash

Florida International University (FIU) - Department of Finance; Florida International University

Chun-Hao Chang

Florida International University (FIU)

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Date Written: August 29, 2007

Abstract

Since the introduction of modern portfolio theory by Roy (1952), Markowitz (1952) and Sharpe (1964) about half a century ago, the allocation of investment weights among various assets in a portfolio is one of the most important areas of research in finance. However, we are not aware of any study that has compared the allocation problem under nominally annualised versus effectively annualised returns. In this paper, we empirically examine the effect of effective annualisation on the variance and skewness of the rates of return probability distribution and the allocation of weights to assets in the portfolio. Our empirical findings conclude that the method of annualisation drastically affects the variance and skewness as well as the allocation of weights to the assets in the portfolio.

Keywords: Portfolio Allocation, Annualization, Returns, Weights, Skewness

JEL Classification: G12

Suggested Citation

Prakash, Arun Jai and Chang, Chun-Hao and Dupoyet, Brice, Optimum Allocation of Weights to Assets in a Portfolio: The Case of Nominal Annualisation Versus Effective Annualisation of Returns (August 29, 2007). Available at SSRN: https://ssrn.com/abstract=3362624 or http://dx.doi.org/10.2139/ssrn.3362624

Arun Jai Prakash

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Florida International University ( email )

Miami, FL 33199
United States

Chun-Hao Chang

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Brice Dupoyet (Contact Author)

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

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