Financial Markets and Portfolio Management, Vol. 18, No. 4, pp. 382-398, 2004
Posted: 12 Sep 2005
Portfolio resampling is a very general and powerful technique to show the dispersion of optimized portfolio weights that arises from estimation error in inputs. Investors should however be aware of potential pitfalls when applying resampling techniques in order to arrive at better portfolios as resampling might deliberately create biases into the portfolio construction process. If short sales are allowed the concept of resampled efficiency will only add noise to optimal portfolios. In case of long only constraints resampling tends to include dominated assets into optimal allocations. Volatility becomes here an attractive feature as it increases the dispersion in resampled inputs and leads to upwards biased allocations. Assets either enter the optimal solution or they don't but they are never shorted.
JEL Classification: G0, G1
Suggested Citation: Suggested Citation
Scherer, Bernd, Resampled Efficency and Portfolio Choice. Financial Markets and Portfolio Management, Vol. 18, No. 4, pp. 382-398, 2004. Available at SSRN: https://ssrn.com/abstract=796625