Normative portfolio theory |
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| Institution: | 1. Department of Finance, Tunghai University, Taichung, Taiwan;2. Beedie School of Business, Simon Fraser University, Vancouver, BC, Canada;1. Department of Accounting and Finance, De Montfort University, England LE2 7BY, United Kingdom;2. Department of Accounting and Finance, University of Strathclyde, Scotland G4 0LN, United Kingdom |
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| Abstract: | In this paper, we correct the adverse impact of estimation risk on both portfolio weights and performance with two new equity allocation methods we implement with estimation-free and estimated ex-ante returns. Portfolios with estimation-free ex-ante returns and systematic-to-unsystematic risk weights have statistically higher Sharpe ratios than both similar portfolios with estimated ex-ante returns and 1/N′th portfolios. Optimal portfolio methods with well-behaved weights guide investors in a way not hitherto possible (normative portfolio theory). |
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