Portfolio Optimization When Expected Stock Returns are Determined by Exposure to Risk

@article{Lindberg2009PortfolioOW,
  title={Portfolio Optimization When Expected Stock Returns are Determined by Exposure to Risk},
  author={Carl Lindberg},
  journal={Capital Markets: Asset Pricing \& Valuation},
  year={2009}
}
  • C. Lindberg
  • Published 12 June 2009
  • Economics
  • Capital Markets: Asset Pricing & Valuation
It is widely recognized that when classical optimal strategies are applied with parameters estimated from data, the resulting portfolio weights are remarkably volatile and unstable over time. The predominant explanation for this is the difficulty of estimating expected returns accurately. In this paper, we modify the $n$ stock Black--Scholes model by introducing a new parametrization of the drift rates. We solve Markowitz' continuous time portfolio problem in this framework. The optimal… 

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