We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1/N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1/N rule in terms of...

We study the impact of parameter uncertainty in multiperiod portfolio selection with trading costs. We analytically characterize the expected loss of a multiperiod investor, and we find that it is equal to the product of two terms. The first term corresponds with the single-period utility loss...

We carry out an analytical investigation on the optimal portfolio policy for a multiperiod mean-variance investor facing multiple risky assets. We consider the case with proportional, market impact, and quadratic transaction costs. For proportional transaction costs, we find that a buy-and-hold...

We provide a general framework for finding portfolios that perform well out-of-sample in the presence of estimation error. This framework relies on solving the traditional minimum-variance problem but subject to the additional constraint that the norm of the portfolio-weight vector be smaller...

We carry out a comprehensive investigation of shrinkage estimators for asset allocation, and we find that size matters—the shrinkage intensity plays a significant role in the performance of the resulting estimated optimal portfolios. We study both portfolios computed from shrinkage estimators...

We study whether investors can exploit stock return serial dependence to improve out-of- sample portfolio performance. To do this, we first show that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, we...

Mean-variance portfolios constructed using the sample mean and covariance matrix of asset returns perform poorly out-of-sample due to estimation error. Moreover, it is commonly accepted that estimation error in the sample mean is much larger than in the sample covariance matrix. For this reason,...