Selecting an Asset Allocation in the Presence of Sampling Error

Macquarie Applied Finance Centre Research Paper

55 Pages Posted: 20 May 2005 Last revised: 7 Jan 2008

Steve Christie

Macquarie University - Applied Finance Centre

Date Written: May 2, 2005

Abstract

Investors choose asset allocations to best meet their needs. Expected utility is one basis for that choice. Investors may also consider Sharpe ratios, Sortino ratios and other measures in making their choices. Expected utility and other measures are functions of moments of the return process - moments which are estimated with error. This error materially impacts the estimate of the function values so that often we cannot distinguish between different asset allocations, let alone decide which allocation is superior. As a result, investment advisers may struggle to demonstrate that their recommended allocation is superior to another, such as a market-weighted allocation.

Keywords: expected utility, sortino ratio, skewness, kurtosis, estimation error, GMM, asset allocation, portfolio choice

JEL Classification: C1, G1

Suggested Citation

Christie, Steve, Selecting an Asset Allocation in the Presence of Sampling Error (May 2, 2005). Macquarie Applied Finance Centre Research Paper. Available at SSRN: https://ssrn.com/abstract=724541 or http://dx.doi.org/10.2139/ssrn.724541

Steve Christie (Contact Author)

Macquarie University - Applied Finance Centre ( email )

Room 732, Building E4A
North Ryde, NSW, 2109
Australia

Paper statistics

Downloads
102
Rank
31,422
Abstract Views
685