Should Investors Choose Both the Highest-Return and Small-Variance Assets When the Mean-Variance Rule Says No? A Study of Health Care and T-Bill in the Investment

47 Pages Posted: 8 Mar 2020

See all articles by Zhihui Lv

Zhihui Lv

Northeast Normal University - KLASMOE & School of Mathematics and Statistics

Amanda M. Y. Chu

affiliation not provided to SSRN

Thomas Chinan Chiang

Drexel University - Department of Finance

Wing-Keung Wong

Asia University, Department of Finance

Date Written: February 11, 2020

Abstract

The high-speed growth of the health care sector has given this sector an increasingly important role in the stock market. This sector however has the highest mean in our study and a low correlation with the business cycle. On the other hand, T-Bill is also an important asset in investment because of its positive return and low variance. In this paper, we examine the conjecture of whether investors should choose both the highest-return and small-variance assets even when the mean-variance rule says “NO”. This conjecture is explored by making a comparison of the performance of portfolios with and without health care and 6-M T-bill in the U.S. market using portfolio optimization, mean-variance and stochastic dominance approaches. Our findings imply that all risk averters prefer to invest in portfolios with both health care and 6-M T-bill, regardless of whether they buy long or sell short in the market. Our findings do not support the existence of any arbitrage opportunity in the markets we studied but do support market efficiency. We also show that risk averters as well as investors with components of both risk aversion and risk seeking will choose both the highest-return and small-variance assets even when the mean-variance rule says NO.

Keywords: Health care sector; T-Bill; Mean-variance portfolio optimization; Mean-risk rules; Stochastic dominance

JEL Classification: C4; D81; G11; I10

Suggested Citation

Lv, Zhihui and Chu, Amanda M. Y. and Chiang, Thomas C. and Wong, Wing-Keung, Should Investors Choose Both the Highest-Return and Small-Variance Assets When the Mean-Variance Rule Says No? A Study of Health Care and T-Bill in the Investment (February 11, 2020). Available at SSRN: https://ssrn.com/abstract=3536287 or http://dx.doi.org/10.2139/ssrn.3536287

Zhihui Lv

Northeast Normal University - KLASMOE & School of Mathematics and Statistics

Changchun
China

Amanda M. Y. Chu

affiliation not provided to SSRN

Thomas C. Chiang

Drexel University - Department of Finance ( email )

32nd & Chestnut Streets
Philadelphia, PA 19104
United States
215-895-1745 (Phone)

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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