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Resampled Frontiers vs Diffuse Bayes: An Experiment

Journal Of Investment Management, Vol. 1, No. 4, Fourth Quarter 2003

Posted: 12 Apr 2004  

Harry Markowitz

University of California at San Diego

Nilufer Usmen

Montclair State University - School of Business

Abstract

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

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

Harry Markowitz (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(858) 534-3383 (Phone)

Nilufer Usmen

Montclair State University - School of Business ( email )

Upper Montclair, NJ 07043
United States
973-655-7075 (Phone)

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