Journal Of Investment Management, Vol. 1, No. 4, Fourth Quarter 2003
Posted: 12 Apr 2004
The experiment reported here compares two methods for handling uncertain inputs to a mean-variance analysis. Specifically, it compares Michaud's resampled frontier versus Bayesian inference with diffuse prior. A simulated "referee" generates ten "truths" about 8 asset classes. For each truth it randomly generates one hundred histories.
A simulated "Bayes Player" and "Michaud Player" process each history according to their respective methodologies, seeking portfolios to maximize given expected utility functions. Players are scored according to the actual utility achieved and their own estimates of this utility. The authors were surprised to find that, on average, the Michaud player won.
Keywords: Resampled Frontier, Bayesian analysis, diffuse Bayes, mean-variance analysis, sampling errors, Michaud
JEL Classification: G00
Suggested Citation: Suggested Citation
Markowitz, Harry and Usmen, Nilufer, Resampled Frontiers vs Diffuse Bayes: An Experiment. Journal Of Investment Management, Vol. 1, No. 4, Fourth Quarter 2003. Available at SSRN: https://ssrn.com/abstract=497290