RT Journal Article
SR Electronic
T1 Enhanced Mean–Variance Portfolios:<br/>
               <em>A Controlled Integration of Quantitative Predictors</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 28
OP 41
DO 10.3905/jpm.2014.40.4.028
VO 40
IS 4
A1 Lars Kaiser
A1 Marco J. Menichetti
A1 Aron Veress
YR 2014
UL https://pm-research.com/content/40/4/28.abstract
AB The intuitiveness and practicality of mean–variance portfolios largely depend on the accuracy of moment estimates, which are subject to large estimation errors and are conditional on time. The authors propose a model that accounts for factor dynamics in a Bayesian setting, in which they endogenously derive the effect of estimation accuracy on the posterior distribution from a linear predictive regression model. By doing so, they capture upside return potential for periods of high factor-explained variance, while constraining downside risk for periods of low predictive quality. Results are robust in a simulation and an empirical setting.TOPICS: Portfolio construction, statistical methods, performance measurement