Least Squares Predictions and Mean-Variance Analysis

CEMFI Working Paper 9711

Posted: 7 Feb 1998

See all articles by Enrique Sentana

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

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Abstract

In an economy with one riskless and one risky asset, we compare the Sharpe ratios of investment funds that follow: i) timing strategies which forecast the market using simple regressions; ii) a strategy which uses multiple regression instead; and iii) a passive allocation which combines the funds in i) with constant weightings. We show that iii) dominates i) and ii), as it implicitly uses the linear forecasting rule that maximizes the Sharpe ratio of actively traded portfolios, but the ranking of i) and ii) is generally unclear. We also discuss under what circumstances the performance of ii) and iii) coincides.

JEL Classification: G11

Suggested Citation

Sentana, Enrique, Least Squares Predictions and Mean-Variance Analysis. CEMFI Working Paper 9711. Available at SSRN: https://ssrn.com/abstract=57848

Enrique Sentana (Contact Author)

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
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+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

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Centre for Economic Policy Research (CEPR)

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