Estimation risk in portfolio selection: the mean variance model versus the mean absolute deviation model

Article Abstract:

The mean absolute deviation (MAD) model introduced by Konno and Yamazaki (1992) as an alternative to the Markowitz mean-variance (MV) portfolio selection model is examined. The new model turns the portfolio selection problem from a quadratic problem to a linear problem by substituting the variance in the MV objective function with the mean absolute deviation. Konno and Yamazaki claim that their model possesses all the favorable attributes of the MV model and offers additional advantages. They contend that the model does not require the covariance matrix of asset returns; that MAD portfolios have less assets and, therefore, lesser transaction costs in portfolio revisions; and that linear problems are easier to solve than quadratic problems. It is shown that the MAD model entails higher estimation risk than the MV model because it ignores the covariance matrix.

Portfolio management, Risk (Economics), Estimation theory, Analysis of variance

---

What is the opportunity cost of mean-variance investment strategies?

Article Abstract:

Mean-variance portfolio selection strategies are evaluated as to foregone opportunity cost. Given a riskless investment opportunity, mean-variance investment strategies results in an approximation of 0.05% asset value opportunity cost, regardless of the degree of risk aversion. However, denial of the riskless asset only results in fair estimates up to a given risk aversion level, beyond which approximation of the opportunity cost is poor. Inaccurate approximation at suchhigh risk aversion levels occurs because the highly risk-averse investor will persist in the safest possible strategy even in the presence of rewarding but slightly more risky options. This obsessive behavior accounts for the poor performance of mean-variance investment strategies in certain cases.

Research, Opportunity cost, Opportunity costs

---

Portfolio selection and asset pricing - three-parameter framework

Article Abstract:

A three-moment model of portfolio selection that describes idiosyncratic security risks is developed. These risksare jointly and spherically distributed, with a generalized covariance matrix and a mean vector. Different securities have different loadings upon a single factor which generates skewness, resulting in three funds: two to span the spherical risk and another to span the skewed risk. The model involves short sales restrictions and describes an investor's risk attitude as a function of the variance and a shape factor of the portfolio distribution, upon which the portfolio skewness depends. This framework, which is similar to the mean-variance model, results in a set of zero-beta portfolios in two dimensions.

Capital assets pricing model, Capital asset pricing model

Similar abstracts:

• Abstracts: Construing the business portfolio: a cognitive model of diversification
• Abstracts: Dividends and S&P 100 index option valuation. Trading costs and the relative rates of price discovery in stocks, futures, and option markets
• Abstracts: What pension should the state provide? Should the basic state pension be a contributory benefit? Housing benefit and financial returns to employment for tenants in the social sector
• Abstracts: How exercise can pay off. Blest be the tapes that bind
• Abstracts: The influence of the source of professional standards on juror decision making. Contrast coding: a refinement of ANOVA in behavioral analysis

This website is not affiliated with document authors or copyright owners. This page is provided for informational purposes only. Unintentional errors are possible.