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More on Estimation Risk and Simple Rules for Optimal Portfolio Selection
Author(s) -
ALEXANDER GORDON J.,
RESNICK BRUCE G.
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb04940.x
Subject(s) - portfolio , estimation , simple (philosophy) , selection (genetic algorithm) , econometrics , tangent , covariance , economics , portfolio optimization , computer science , mathematical optimization , actuarial science , mathematics , financial economics , artificial intelligence , statistics , philosophy , geometry , management , epistemology
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.