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OPTIMAL PORTFOLIO DIVERSIFICATION AND THE EFFECTS OF DIFFERING INTRA SAMPLE MEASURES OF RETURN
Author(s) -
Board J. L. G.,
Sutcliffe C. M. S.
Publication year - 1985
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1985.tb00795.x
Subject(s) - econometrics , diversification (marketing strategy) , portfolio , efficient frontier , sample mean and sample covariance , variance (accounting) , economics , statistics , sample (material) , mathematics , financial economics , business , chemistry , accounting , chromatography , marketing , estimator
It is shown that share returns series constructed from averaged data lead to biased estimates of the mean, variance and covariances of the underlying returns series. The computed variances and covariances will be only 2/3rds of their true values, whilst the mean will be reduced by 1/6th of the true variance. It is shown that this leads to distortions in the mean‐variance efficient frontier and the implied investment proportions. A number of studies of international portfolio diversification have used averaged data and, therefore, an empirical study of IPD is reported which investigates the magnitude of the biases and the extent to which they can be corrected.