The Efficient Use of Conditioning Information in Portfolios

Authors

  • Wayne E. Ferson,

  • Andrew F. Siegel

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    • Wayne E. Ferson is the Pigott-PACCAR Professor of Finance at the University of Washington and a Research Associate, NBER. Andrew F. Siegel is the Grant I. Butterbaugh Professor of Finance and Management Science and Adjunct Professor of Statistics at the University of Washington. We are grateful to Hank Bessembinder, Jonathan Berk, John Cochrane, Heber Farnsworth, the editor, Richard Green, Bruce Grundy, Lars Hansen, David Ikenberry, Patrice Poncet, Jeff Pontiff, Mark Ready, Ed Rice, Vance Roley, Richard W. Sias, Richard Startz, and an anonymous referee for helpful comments. The paper has also benefited from participants in workshops at the following universities: Arizona, Boston College, California at Berkeley, Duke, Illinois, Miami, New York University, Purdue, Rice, la Sorbonne, Southern California, South Carolina, Stanford, The Stockholm School of Economics, Utah, Wisconsin-Madison, the University of Washington (Finance, Management Science, and Statistics Departments), and Washington State University; also at the 1998 American Finance Association, the 1997 American Statistical Association (Anaheim), 1997 European Finance Association in Vienna, the 1997 Inquire Europe Autumn Seminar, the 1997 Euro Working Group on Financial Modelling Meeting in Venice, April 1997 meeting of the National Bureau of Economic Research Asset Pricing Group, VII International Conference on Stochastic Programming (1998) and the 1997 Western Finance Association meetings.

Abstract

We study the properties of unconditional minimum-variance portfolios in the presence of conditioning information. Such portfolios attain the smallest variance for a given mean among all possible portfolios formed using the conditioning information. We provide explicit solutions for n risky assets, either with or without a riskless asset. Our solutions provide insights into portfolio management problems and issues in conditional asset pricing.

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