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More on Estimation Risk and Simple Rules for Optimal Portfolio Selection

1985; Wiley; Volume: 40; Issue: 1 Linguagem: Inglês

10.2307/2328051

1540-6261

Gordon J. Alexander, Bruce G. Resnick,

Capital Investment and Risk Analysis

The Journal of FinanceVolume 40, Issue 1 p. 125-133 Article More on Estimation Risk and Simple Rules for Optimal Portfolio Selection GORDON J. ALEXANDER, GORDON J. ALEXANDERSearch for more papers by this authorBRUCE G. RESNICK, BRUCE G. RESNICK Both authors from University of Minnesota; first author currently visiting the University of California, Los Angeles. We are grateful for contributions from Christopher B. Barry, P. George Benson, and especially Stephen J. Brown.Search for more papers by this author GORDON J. ALEXANDER, GORDON J. ALEXANDERSearch for more papers by this authorBRUCE G. RESNICK, BRUCE G. RESNICK Both authors from University of Minnesota; first author currently visiting the University of California, Los Angeles. We are grateful for contributions from Christopher B. Barry, P. George Benson, and especially Stephen J. Brown.Search for more papers by this author First published: March 1985 https://doi.org/10.1111/j.1540-6261.1985.tb04940.xCitations: 21 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat ABSTRACT For the risk-averse investor, consideration of estimation risk is important in selecting an expected-utility-maximizing portfolio. It has previously been shown that the composition of the tangency portfolio is unaffected by the recognition of estimation risk if the Full Covariance Model is used. Alternatively, if the Market Model is used, the composition of the tangency portfolio has been shown to be affected by the recognition of estimation risk. However, as is demonstrated in this paper, the effect will generally not be as substantive as previously believed and in many situations can be safely ignored. REFERENCES 1Christopher B. Barry. "Portfolio Analysis Under Uncertain Means, Variances, and Covariances." The Journal of Finance 29 (May 1974), 515–22. 2Christopher B. Barry. "Effects of Uncertain and Nonstationary Parameters upon Capital Market Equilibrium Conditions." Journal of Financial and Quantitative Analysis 13 (September 1978), 419–33. 3Christopher B. Barry and Stephen J. Brown. "Differential Information and Security Market Equilibrium." Journal of Financial and Quantitative Analysis, forthcoming. 4Vijay S. Bawa and Stephen J. Brown. "Capital Market Equilibrium: Does Estimation Risk Really Matter?." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice, Amsterdam: North-Holland, 1979, pp. 86–93. 5Vijay S. Bawa and Stephen J. Brown and Roger W. Klein. Estimation Risk and Optimal Portfolio Choice. Amsterdam: North-Holland, 1979. 6Vijay S. Bawa and Stephen J. Brown and Roger W. Klein. "Estimation Risk and Optimal Portfolio Choice: A Selective Review." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice, Amsterdam: North-Holland, 1979, pp. 37–49. 7S. Brown. "The Effect of Estimation Risk on Capital Market Equilibrium." Journal of Financial and Quantitative Analysis 14 (June 1979), 215–20. 8S. Brown. "Optimal Portfolio Choice Under Uncertainty: A Bayesian Approach." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice. Amsterdam: North-Holland, 1979, pp. 109–44. 9S. Brown. "Estimation Risk and Optimal Portfolio Choice: The Sharpe Index Model." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice, Amsterdam: North-Holland, 1979, pp. 145–71. 10Son-Nan Chen and Stephen J. Brown. "Estimation Risk and Simple Rules for Optimal Portfolio Selection." The Journal of Finance 38 (September 1983), 1087–93. 11Edwin J. Elton and Martin F. Gruber. Modern Portfolio Theory and Investment Analysis. New York: John Wiley & Sons, Inc., 1984. 12Edwin J. Elton and Martin F. Gruber and Manfred W. Padberg. "Simple Criteria for Optimal Portfolio Selection." The Journal of Finance 31 (December 1976), 1341–57. 13Eugene F. Fama. Foundations of Finance. New York: Basic Books, 1976. 14Roger W. Klein and Vijay S. Bawa. "The Effect of Estimation Risk on Optimal Portfolio Choice." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice, Amsterdam: North-Holland, 1979, pp. 50–65. 15Roger W. Klein and Vijay S. Bawa. "The Effect of Limited Information and Estimation Risk on Optimal Portfolio Diversification." In V. Bawa, S. Brown, and R. Klein (Eds.), Estimation Risk and Optimal Portfolio Choice, Amsterdam: North-Holland, 1979, pp. 66–85. Citing Literature Volume40, Issue1March 1985Pages 125-133 ReferencesRelatedInformation