In Defense of Portfolio Optimization: What If We Can Forecast?

摘要

We challenge the academic consensus that estimation error makes mean-variance portfolio strategies inferior to passive equal-weighted approaches. We demonstrate analytically, via simulation. and empirically that investors endowed with modest forecasting ability benefit substantially from a mean-variance approach. An investor with some forecasting ability improves expected utility by increasing the number of assets considered. We frame our study realistically using budget constraints, transaction costs, and out-of-sample testing for a wide range of investments. We derive practical decision rules to choose between passive and mean-variance optimization and generate results consistent with much financial market practice and the original Markowitz formulation.