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EnglishImplementing portfolio optimization techniques in practice is a challenging task because of the presence of estimation risk for the required parameters, namely expected returns and covariances. This paper provides a detailed empirical analysis of the trade-off between estimation risk, i.e., the risk of imperfect estimation for the required risk and return parameters, and optimality risk, the risk induced by investing in a heuristic portfolio strategy (e.g., an equally-weighted scheme) that requires fewer or no parameter estimates. Formally, we measure the opportunity costs related to estimation risk and optimality risk as the difference in ex-ante Sharpe ratios between the true maximum Sharpe ratio portfolio and the benchmark used in practice, which is plagued by the presence of estimation risk and/or optimality risk.
Martellini, L., Milhau, V., Tarelli, A., Estimation risk versus optimality risk: An ex-ante efficiency analysis of alternative equity portfolio diversification strategies, <<RB BANKERS, MARKETS, INVESTORS>>, 2014; (132): 26-42 [http://hdl.handle.net/10807/92237]
| Autori: | ||
| Titolo: | Estimation risk versus optimality risk: An ex-ante efficiency analysis of alternative equity portfolio diversification strategies | |
| URL: | https://ideas.repec.org/a/rbq/journl/i132p26-42.html | |
| Data di pubblicazione: | 2014 | |
| Abstract: | Implementing portfolio optimization techniques in practice is a challenging task because of the presence of estimation risk for the required parameters, namely expected returns and covariances. This paper provides a detailed empirical analysis of the trade-off between estimation risk, i.e., the risk of imperfect estimation for the required risk and return parameters, and optimality risk, the risk induced by investing in a heuristic portfolio strategy (e.g., an equally-weighted scheme) that requires fewer or no parameter estimates. Formally, we measure the opportunity costs related to estimation risk and optimality risk as the difference in ex-ante Sharpe ratios between the true maximum Sharpe ratio portfolio and the benchmark used in practice, which is plagued by the presence of estimation risk and/or optimality risk. | |
| Lingua: | Inglese | |
| Rivista: | ||
| Citazione: | Martellini, L., Milhau, V., Tarelli, A., Estimation risk versus optimality risk: An ex-ante efficiency analysis of alternative equity portfolio diversification strategies, <<RB BANKERS, MARKETS, INVESTORS>>, 2014; (132): 26-42 [http://hdl.handle.net/10807/92237] | |
| Appare nelle tipologie: | Articolo in rivista, Nota a sentenza |
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