Comparing Mean-Variance Portfolios and Equal-Weight Portfolios for Major US Equity Indexes
13 Pages Posted: 12 Jun 2019
Date Written: May 28, 2019
We compared performance of Pearson’s correlations based (PeMVPs) and partial correlations based (PaMVPs) mean variance portfolios (MVPs) with equal-weight portfolios (EWPs) for several US equity indexes. We found that performance of MVPs and EWPs depends on two factors: the constituents of the underlying equity index and its holding period. When a market-wide index contained super-high growth technology stocks, such as FAANNG in the S&P 500, PeMVP being a concentrated growth portfolio unsurprisingly outperformed more diversified PaMVP and EWP. However, when FAANNG were dropped from the S&P 500, and even in the case of the S&P 500 Growth (that lacks relatively low-performing value stocks), PeMVP did not outperform PaMVP at the three- and six-month holding periods. Moreover, at a shorter, one-month holding period, PaMVP was statistically superior. For other equity indexes considered in this work, PaMVP always outperformed PeMVP, and EWP could outperform PeMVP at shorter holding periods.
Keywords: mean variance portfolio, equal weight portfolio, partial correlations, out-of-sample performance
JEL Classification: G11
Suggested Citation: Suggested Citation