Implied returns and the choice of a mean-variance efficient portfolio proxy
| Project responsable | David Ardia |
| Project partner | Kris Boudt |
| Abstract |
Implied expected returns are the expected returns for which a
supposedly mean-variance efficient portfolio is effectively
efficient given a covariance matrix. We analyze the statistical
properties of monthly implied expected return estimates and study
their sensitivity to the choice of a mean-variance efficient
portfolio proxy. Over the period January 1984 to December 2012 and
for the universe of S&P 100 stocks we find that the largest
gains are in terms of stability of the return forecasts. The use of
a maximum diversification or equal-risk-contribution portfolio as
proxy reduces significantly the cross-section and time series
dispersion in the implied expected return forecasts and leads to a
small improvement in forecast precision, compared to using a market
capitalization, fundamental value or equal weighting scheme. For all
proxies considered, the implied expected return estimates outperform
the time series model based forecasts in terms of stability and
forecast precision. |
| Keywords |
Implied expected return, mean-variance, portfolio allocation, reverse engineering, risk-based allocation |
| Project homepage | http://dx.doi.org/10.2139/ssrn.2215042 |
| Type of project | Applied research project |
| Research area | Finance |
| Status | Completed |
| Start of project | 1-2013 |
| End of project | 12-2015 |
| Overall budget | 30,000 CAD |
| Additional info |
Subvention, Université Laval - démarrage nouveau
chercheur |
| Contact | David Ardia |