We would like to thank the editor John Doukas and an anonymous referee for their helpful comments and suggestions. We are grateful to Dirk Brounen, Bradley Case, Mathijs van Dijck, Gonçalo Faria, Lorenzo Garlappi, Bruno Gerard, Loriana Pelizzon, Andrea Tortora, Luis Viceira, and Grigory Vilkov for suggestions and discussions. We also thank for their comments participants at the AREUEA meetings in Atlanta, the Conference on Money, Banking, and Finance (Rome), the Conference of the Swiss Society for Financial Market Research, the European Finance Association in Frankfurt, IREBS Conference in Regensburg, the Financial Management Association in Atlanta, and the Workshop on Applied Finance and Financial Econometrics (Berlin). Giovanni Bissolino, Raffaele Corvino, and Yu Man Tam provided excellent research assistance. Financial support from the Italian Research Department (PRIN) is gratefully acknowledged.
Equally Weighted vs. Long-Run Optimal Portfolios
Version of Record online: 23 JUL 2014
© 2014 John Wiley & Sons Ltd
European Financial Management
How to Cite
Fugazza, C., Guidolin, M. and Nicodano, G. (2014), Equally Weighted vs. Long-Run Optimal Portfolios. European Financial Management. doi: 10.1111/EUFM.12042
- Version of Record online: 23 JUL 2014
- equally weighted portfolios;
- strategic asset allocation;
- Real Estate Investment Trusts (REITs);
- return predictability;
- parameter uncertainty
Out-of-sample experiments cast doubt on the ability of portfolio optimising strategies to outperform equally weighted portfolios, when investors have a 1-month time horizon. This paper examines whether this finding holds for longer investment horizons over which the optimising strategy exploits linear predictability in returns. Our experiments indicate that investors with longer horizons on average would have benefited, ex post, from an optimising strategy over the period 1995–2009. We analyse performance sensitivity to investor risk aversion, to the number of predictors included in the forecasting model and to the deduction of transaction costs from portfolio performance.