OPTIMAL PORTFOLIO DIVERSIFICATION AND THE EFFECTS OF DIFFERING INTRA SAMPLE MEASURES OF RETURN |
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| Authors: | J. L. G. Board C. M. S. Sutcliffe |
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| Affiliation: | The authors are from the Department of Economics at the University of Reading. The comments of Peter Hart of Reading University, Michael Theobald now of Birmingham University and Martin Walker of the London School of Economics on an earlier draft of this paper are gratefully acknowledged. |
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| Abstract: | It is shown that share returns series constructed from averaged data lead to biased estimates of the mean, variance and covariances of the underlying returns series. The computed variances and covariances will be only 2/3rds of their true values, whilst the mean will be reduced by 1/6th of the true variance. It is shown that this leads to distortions in the mean-variance efficient frontier and the implied investment proportions. A number of studies of international portfolio diversification have used averaged data and, therefore, an empirical study of IPD is reported which investigates the magnitude of the biases and the extent to which they can be corrected. |
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