Optimal and Naive Diversification in Currency Markets

  title={Optimal and Naive Diversification in Currency Markets},
  author={Fabian Ackermann and Walt Pohl and Karl Schmedders},
  journal={International Political Economy: Monetary Relations eJournal},
DeMiguel, Garlappi, and Uppal (Review of Financial Studies, 22 (2009), 1915-1953) showed that in the stock market, it is difficult for an optimized portfolio constructed using mean-variance analysis to outperform a simple equally-weighted portfolio because of estimation error. In this paper, we demonstrate that portfolio optimization can be made to work in currency markets. The key difference between the two settings is that in currency markets interest rates provide a predictor of future… 
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