HOMEINVESTMENT PRODUCTS SOFTWARE PRODUCTS ABOUT NEW FRONTIER

Do RE optimal portfolios outperform MV?

RE optimized portfolios can be shown on average to enhance return or reduce risk relative to associated MV portfolios.  The method used for proving the superiority of RE optimized portfolios is not based on a backtest.  Backtests are always unreliable because they depend on the special character of a particular time period.  A different time period may show very different results.  The proofs use Monte Carlo simulation methods or simulation tests.  These mathematically and statistically rigorous reflect what on average happens when RE or MV optimization is used relative to some given “truth” about the past or future.  While in-sample MV portfolios show more return for a given level of risk, they overuse the information in a set of risk-return estimates and on average provide less return when implemented.