### Mean-Variance Optimization Versus Equal Weight

**July 17, 2012** - Strategic Allocation

Is equal weighting of diversified portfolio assets good enough, or are mean-variance optimized allocation strategies constructed from asset return and variance forecasts worth the complexities of implementation? In the June 2012 draft of their paper entitled “Market Volatility, Optimal Portfolios and Naive Asset Allocations”, Massimiliano Caporin and Loriana Pelizzon investigate the conditions under which mean-variance optimized portfolios outperform an equal-weight portfolio. They consider four optimized allocation strategies (mean-variance, and three variations of global minimum variance with no shorting). They apply these strategies to five sets of equity assets diversified across different U.S. stock anomalies according to: (1) industry; (2) size/value; (3) size/short-term reversal; (4) size/momentum; and, (5) size/long-term reversal. They consider four methods for forecasting returns and volatilities for these assets (lagged rolling values, regression on explanatory variables and two technical autoregressions that detect mean reversion), all based on a 60-month or 120-month rolling historical window. They use Sharpe ratio to compare portfolio performances. Using monthly data for the five selected sets of equity assets from Kenneth French’s library spanning April 1953 through December 2010 (693 months), *they find that:* Keep Reading