Showing papers on "Efficient frontier published in 1992"
TL;DR: In this paper, the authors characterize the conditions under which efficient portfolios put small weights on individual assets, and show that the extreme weightings in sample efficient portfolios are due to the dominance of a single factor in equity returns.
Abstract: We characterize the conditions under which efficient portfolios put small weights on individual assets. These conditions bound mean returns with measures of average absolute covariability between assets. The bounds clarify the relationship between linear asset pricing models and well-diversified efficient portfolios. We argue that the extreme weightings in sample efficient portfolios are due to the dominance of a single factor in equity returns. This makes it easy to diversify on subsets to reduce residual risk, while weighting the subsets to reduce factor risk simultaneously. The latter involves taking extreme positions. This behavior seems unlikely to be attributable to sampling error. THE MEAN-VARIANCE EFFICIENT frontier plays an important role in pedagogy and applications in finance. The properties of efficient portfolios are also central in both static and dynamic asset pricing.1 For all its simplicity and intuitive appeal, however, practical implementation of mean-variance analysis has proved problematic. Portfolios constructed using sample moments of returns often involve very extreme positions. As the number of assets grow, the weights on individual assets do not approach zero as quickly as suggested by naive notions of "diversification." Admittedly, the theoretical links between "diversification," in the sense of putting small weight on any asset, and variance minimization are tenuous. The Arbitrage Pricing Theory (APT) implies that efficient portfolios are well diversified, but the mean-variance Capital Asset Pricing Model (CAPM) requires this only insofar as the value weighted market portfolio is diversified. In applications, however, the connection between mean-variance efficiency and diversification is central. Black and Litterman (1990), for example, point to the inconsistency between naive diversification and the weights generated by asset allocation models as a major obstacle to their implementation. Practitioners are suspicious of portfolios that are not naively
371 citations
TL;DR: The theory of finance demonstrates that diversified investment portfolios produce superior combinations of risk and return, and that investors may choose a portfolio reflecting their preferred mix of risks and returns.
Abstract: The theory of finance demonstrates that diversified investment portfolios produce superior combinations of risk and return, and that investors may choose a portfolio reflecting their preferred mix of risk and return. These techniques may be applied to military alliances. The rate of return and risk of an ally follows a positive linear relationship, as predicted by capital asset pricing theory. Random diversification of allies will, as with investment portfolios, reduce the country-unique components of alliance risk toward that which is inherent in the system as a whole. Some alliances will be more efficient at producing greater return and lower risk. The most efficient alliances will be those in which variations in ally effort move in opposite directions. Development of the demand side of portfolio analysis may predict which alliances are optimal, and therefore most likely to form. These principles are applied to the Triple Entente and Triple Alliance between 1879 and 1914. It is suggested that the Entent...
44 citations
TL;DR: In this paper, the authors developed a maximum likelihood estimators of production technologies that deal with missing data and measurement errors, making alternative assumptions regarding the endogeneity of labor and missing data patterns.
41 citations
Book•
17 Apr 1992
TL;DR: In this article, the authors introduce the concept of multiple simultaneous positions under the Parametric approach and show the relation between relative relationships and derive the efficient frontier of the Efficient Frontier.
Abstract: The Empirical Techniques. Characteristics of Fixed Fractional Trading and Salutary Techniques. Parametric Optimal f on the Normal Distribution. Parametric Techniques on Other Distributions. Introduction to Multiple Simultaneous Positions Under the Parametric Approach. Correlative Relationships and the Derivation of the Efficient Frontier. The Geometry of Portfolios. Risk Management. Appendices. Bibliography and Suggested Reading. Index.
38 citations
IBM1
TL;DR: Frontier as discussed by the authors is a graphical user interface for portfolio optimization built for the new IBM workstation, the RISC System/6000™, out of basic X-windows and OSL utilities.
Abstract: “Frontier” is a pilot graphical user interface for portfolio optimization built for the new IBM workstation, the RISC System/6000™, out of basic X-windows and OSL utilities. The program asks the user to select a piecewise linear-quadratic risk measure, draws a risk/reward efficient frontier, and permits the user to examine the efficient frontier using zoom and histogram display facilities. This paper describes the interfaces and discusses possible extensions.
31 citations
TL;DR: This work examines a single-machine scheduling problem where the objective is to minimize the mean and the variance of the job completion times simultaneously and proposes a heuristic procedure which is quite general and can be applied to other bi-criteria problems as well.
Abstract: We examine a single-machine scheduling problem where the objective is to minimize the mean and the variance of the job completion times simultaneously. We seek to identify the efficient frontier which is obtained by parametrically solving a weighted combination of the two criteria. The identification of the true efficient frontier for this problem is notoriously difficult. To estimate the frontier, we propose a heuristic procedure which is quite general and can be applied to other bi-criteria problems as well. It involves repeated applications of a relatively new technique called beam search in an adaptive manner. To evaluate the proposed procedure, we introduce two measures of performance and conduct a computational study. The results of the study indicate that the procedure is highly effective.
27 citations
TL;DR: In this paper, all the efficient set mathematics for mean-variance portfolio problems and all the analytics of sensitivity analysis for MV portfolio problems follow from a general parametric quadratic programming problem, the Karush-Kuhn-Tucker or optimality conditions for it and the definitions of the expected return and variance of a portfolio.
26 citations
TL;DR: In this paper, the non-price features of British retail bank products were investigated and a methodology for computing interest equivalences for a selection of characteristics was presented. But the main findings are that certain non-prices features are significant and there does not appear to be a strong case for separating out those products that lie on an efficiency frontier.
Abstract: This paper seeks to price the nonprice features of British retail bank products. It outlines a methodology for computing interest equivalences for a selection of characteristics. Estimates are obtained for a full observation set and a subset of survivor products on an efficiency frontier. Its main findings are that certain nonprice features are significant and there does not appear to be a strong case for separating out those products that lie on an efficiency frontier. Copyright 1992 by Ohio State University Press.
26 citations
TL;DR: In this paper, the authors discuss commentaries by Maynes and Hjorth-Andersen on their earlier paper (1990), and then go on to discuss the merits of various measures of market efficiency which have appeared in the literature.
Abstract: In this paper, we discuss commentaries by Maynes and Hjorth-Andersen on our earlier paper (1990), and then go on to discuss the merits of various measures of market efficiency which have appeared in the literature. While Maynes criticized the model in our 1990 paper for a lack of realism, we argue that our limited objective of demonstrating that price-quality correlations are not necessarily related to market efficiency did not require a model which was realistic in all details. We also demonstrate that our basic conclusion that the price-quality correlation need not measure market efficiency does not depend on our theoretical model. Hjorth-Andersen advanced a number of alternative reasons why price-quality correlations may not measure efficiency, and we view his arguments largely as complementary to ours. The basic conclusion is that there are severe problems with interpreting measured price-quality correlations as measures of efficiency. We go on to discuss alternative measures. While no alternatives are completely satisfactory, we argue that measures based on deviations from an efficient frontier have some attractive properties, and are currently the most desirable alternative.
12 citations
4 citations
TL;DR: The ex post efficient frontier is the tradeoff between portfolio average return and standard deviation which could have been attained in some capital market over a set of consecutive historical subperiods as mentioned in this paper.
Abstract: The ex post efficient frontier is the tradeoff between portfolio average return and standard deviation which could have been attained in some capital market over a set of consecutive historical subperiods. This article formulates three different problems of deriving the ex post efficient frontier. These problems differ in the extent to which portfolio revision is permitted between subperiods. The ex post efficient frontier may be useful as a reference point in evaluating the performance of mutual funds and other institutional portfolios. This is illustrated for a set of Swedish mutual funds.
01 Jan 1992
TL;DR: In this paper, the authors propose a portfolio management approach to allocate a limited quantity of re-source to be allocated among a number of possible uses when various levels of resource could be allocated to each use and where significant uncertainty and associated risk is involved.
Abstract: ‘Portfolio’ management is usually characterized by a limited quantity of re-source to be allocated among a number of possible uses when various levels of resource could be allocated to each use and where significant uncertainty and associated risk is involved. The amount of resource available may be limited in a strict sense, but this need not be the case. A typical example would be the selection of a portfolio of securities. A less obvious example would be the allocation of crops to farm land. There is a large number of other important applications.