More on Estimation Risk and Simple Rules for Optimal Portfolio Selection
- Full Text PDF
- Author(s): GORDON J. ALEXANDER, BRUCE G. RESNICK
- Published: Apr 30, 2012
- Pages: 125-133
- DOI: 10.1111/j.1540-6261.1985.tb04940.x
For the risk‐averse investor, consideration of estimation risk is important in selecting an expected‐utility‐maximizing portfolio. It has previously been shown that the composition of the tangency portfolio is unaffected by the recognition of estimation risk if the Full Covariance Model is used. Alternatively, if the Market Model is used, the composition of the tangency portfolio has been shown to be affected by the recognition of estimation risk. However, as is demonstrated in this paper, the effect will generally not be as substantive as previously believed and in many situations can be safely ignored.