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The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs.

Strathprints serves world leading Open Access research by the University of Strathclyde, including research by the Strathclyde Institute of Pharmacy and Biomedical Sciences (SIPBS), where research centres such as the Industrial Biotechnology Innovation Centre (IBioIC), the Cancer Research UK Formulation Unit, SeaBioTech and the Centre for Biophotonics are based.

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Risk reduction and mean-variance analysis : an empirical investigation

Fletcher, Jonathan (2009) Risk reduction and mean-variance analysis : an empirical investigation. Journal of Business Finance and Accounting, 36 (7-8). pp. 951-971. ISSN 0306-686X

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Abstract

I examine the performance of global minimum variance (GMV) and minimum tracking error variance (TEV) portfolios in UK stock returns using different models of the covariance matrix. I find that both GMV and TEV portfolios deliver portfolio risk reduction benefits in terms of significantly lower volatility and tracking error volatility relative to passive benchmarks for every model of the covariance matrix used. However, the GMV (TEV) portfolios do not provide significantly superior Sharpe (1966) (adjusted Sharpe) performance relative to passive benchmarks except for the restricted GMV portfolios. I find that a number of alternative covariance matrix models can improve the performance of the restricted TEV portfolio formed using the sample covariance matrix but not the restricted GMV portfolio. I also find that simpler covariance matrix models perform as well as the more sophisticated models