Equal Weighting vs. All Feasible Long-only Mean-variance Optimals
December 17, 2014 - Strategic Allocation
Is equal weighting (1/n) of portfolio components a good choice? In their November 2014 paper entitled “Is 1/n Really Better Than Optimal Mean-Variance Portfolio?”, Woo Chang Kim, Yongjae Lee and William Ziemba assess 1/n weighting by comparing its performance to the performances of all feasible mean-variance optimal portfolios for different asset universes. By “all feasible,” they mean many long-only mean-variance optimal portfolios generated by randomly picking the estimated future return-to-variance ratios for assets within a universe. They use Sharpe ratio to measure portfolio performance. They consider 10 asset universes: 10 U.S. equity sectors; 10 U.S. equity industries; eight country equity indexes; three U.S. equity factor portfolios; six U.S. equity styles; 25 U.S. equity styles; 100 U.S. equity styles; 250 large-capitalization U.S. stocks; 250 medium-capitalization U.S. stocks; and, 250 small-capitalization U.S. stocks.They apply mostly annual rebalancing but also consider semiannual and quarterly rebalancing for the three stock universes. They also test 1/n versus capitalization weighting for seven of the 10 universes. Using returns for specified assets at the tested rebalancing frequencies with sample start dates as early as July 1963 and end dates as late as June 2014, they find that: Keep Reading