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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

Item type: Article
ID code: 16009
Keywords: covariance matrix, shrinkage methods, mean-variance analysis, Finance, Finance, Business, Management and Accounting (miscellaneous), Accounting
Subjects: Social Sciences > Finance
Department: Strathclyde Business School > Accounting and Finance
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Depositing user: Miss Donna McDougall
Date Deposited: 20 Jan 2010 11:41
Last modified: 05 Sep 2014 03:37
URI: http://strathprints.strath.ac.uk/id/eprint/16009

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