Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?

  title={Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?},
  author={Victor DeMiguel and Lorenzo Garlappi and Raman Uppal},
  journal={Review of Financial Studies},
We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1-N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1-N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which indicates that, out of sample, the gain from optimal diversification is more than offset by estimation error. Based on parameters calibrated… 

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  • P. FrostJ. Savarino
  • Economics, Computer Science
    Journal of Financial and Quantitative Analysis
  • 1986
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