Making Markowitz's Portfolio Optimization Theory Practically Useful

45 Pages Posted: 8 May 2006 Last revised: 8 Oct 2016

See all articles by Zhidong Bai

Zhidong Bai

Northeast Normal University

Huixia Liu

Northeast Normal University

Wing-Keung Wong

Asia University, Department of Finance

Date Written: October 8, 2016

Abstract

The traditional estimated return for the Markowitz mean-variance optimization has been demonstrated to be seriously departed from its theoretic value. We prove that this phenomenon is natural and the estimated optimal return is always larger than its theoretic parameter. Thereafter, we develop new bootstrap estimators for the optimal return and its asset allocation and prove that these bootstrap estimates are consistent with their counterpart parameters. Our simulation confirms the consistency; implying the essence of the portfolio analysis problem could be adequately captured by our proposed estimates. This greatly enhances the Markowitz meanvariance optimization procedure to be practically useful.

Keywords: Optimal Portfolio Allocation, Mean-Variance Optimization, Large Random Matrix, Bootstrap Method

JEL Classification: G11, C13

Suggested Citation

Bai, Zhidong and Liu, Huixia and Wong, Wing-Keung, Making Markowitz's Portfolio Optimization Theory Practically Useful (October 8, 2016). Available at SSRN: https://ssrn.com/abstract=900972 or http://dx.doi.org/10.2139/ssrn.900972

Zhidong Bai

Northeast Normal University ( email )

Changchun
China

Huixia Liu

Northeast Normal University ( email )

Changchun
China

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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