Optimal versus Naive Diversification: How Inefficient Is the 1/N Portfolio Strategy?

DeMiguel, Victor; Garlappi, Lorenzo; Uppal, Raman

doi:10.1093/acprof:oso/9780199744282.003.0034

Cited by 692 publications

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“…As DeMiguel et al, (2009) show, over a sample of seven datasets, the simple 1/N rule outperforms the Markov Portfolio strategy in fourteen alternative portfolio specifications. "Rational" allocation strategies yield very high estimation errors in the variance-covariance matrices.…”

Section: Routines Rules Of Thumb Heuristicsmentioning

confidence: 98%

In order to stand up you must keep cycling: Change and coordination in complex evolving economies

Dosi

Virgillito

2021

Structural Change and Economic Dynamics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In this work we discuss the main building blocks, achievements and challenges of an evolutionary interpretation of the relation between mechanisms of coordination and drivers of change in modern economies, seen as complex evolving systems. It is an evident stylised fact of modern economic systems that there are forces at work which keep them together and make them grow despite rapid and profound modifications of their industrial structures, social relations, techniques of production, patterns of consumption. We suggest that a fruitful interpretation of the two processes rests in what we call the "bicycle conjecture": in order to stand up you must keep cycling. However, changes and transformation are by nature "disequilibrating" forces. Thus there must be other factors which maintain relatively ordered configurations of the system and allow a broad consistency between the conditions of material reproduction (including income distributions, accumulation, available techniques) and the thread of social relations. Terms of use: Documents in

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Section: Routines Rules Of Thumb Heuristicsmentioning

confidence: 98%

In order to stand up you must keep cycling: Change and coordination in complex evolving economies

Dosi

Virgillito

2021

Structural Change and Economic Dynamics

View full text Add to dashboard Cite

show abstract

“…Although DeMiguel et al (2009) The central intuition for our findings is based on the tradeoff between the exploitation of mispricing and sampling variation in estimated parameters when comparing mean-variance strategies against the 1/N rule. In the absence of mispricing, estimation errors cause the mean-variance strategies to under-perform the 1/N rule.…”

Section: Plans Indicate That Participants Tend To Allocate Their Contmentioning

confidence: 96%

“…In this case, the 1/N rule is likely to outperform sample-based mean-variance strategies, which are plagued by estimation errors. Our analytical expression provides an explanation for the excellent performance of the 1/N rule in DeMiguel et al (2009) without resorting to simulations.…”

Section: Introductionmentioning

confidence: 96%

“…An alternative to the mean-variance framework is the naïve equal-weight portfolio investing 1/N of total wealth in each of the N assets, which can be found in the ancient Babylonian Talmud 1500 years ago and has been observed for individual investors in modern times (Benartzi and Thaler, 2001;Huberman and Jiang, 2006;Brown et al, 2007). The 1/N rule does not require parameter estimation and it has been shown that the mean-variance strategies cannot beat the 1/N rule in a strand of literature including, among others, DeMiguel et al (2009), casting doubts upon the practical usefulness of the Markowitz framework.…”

Section: Introductionmentioning

confidence: 99%

“…Estimation errors in the sample means have a greater influence on the performance of mean-variance strategies than the ones in the sample covariance matrix. As a result, the literature has shifted attention from mean-variance strategies to minimum-variance strategies (Green and Hollifield, 1992;Jagannathan and Ma, 2003;Ledoit and Wolf, 2003;DeMiguel et al, 2009) 3 . However, Wang et al…”

Section: Introductionmentioning

confidence: 99%

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