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Equally Weighted vs. Long‐Run Optimal Portfolios
Author(s) -
Fugazza Carolina,
Guidolin Massimo,
Nicodano Giovanna
Publication year - 2015
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12042
Subject(s) - predictability , portfolio , transaction cost , economics , econometrics , investment strategy , investment (military) , risk aversion (psychology) , exploit , sample (material) , actuarial science , financial economics , computer science , mathematics , microeconomics , statistics , monetary economics , expected utility hypothesis , market liquidity , chemistry , computer security , chromatography , politics , law , political science
Out‐of‐sample experiments cast doubt on the ability of portfolio optimising strategies to outperform equally weighted portfolios, when investors have a 1‐month time horizon. This paper examines whether this finding holds for longer investment horizons over which the optimising strategy exploits linear predictability in returns. Our experiments indicate that investors with longer horizons on average would have benefited, ex post, from an optimising strategy over the period 1995–2009. We analyse performance sensitivity to investor risk aversion, to the number of predictors included in the forecasting model and to the deduction of transaction costs from portfolio performance.