Toward the Design of Better Equity Benchmarks

  title={Toward the Design of Better Equity Benchmarks},
  author={Lionel Martellini},
Following recent research on the relevance of idiosyncratic risk in asset pricing models, the author proposes using total volatility as a model-free estimate of a stock's excess expected return and analyzes the implications, in terms of design, for improved equity benchmarks. The author finds that maximum Sharpe ratio portfolios are consistent with such expected return proxies and, if built upon improved estimates of the correlation parameters, will significantly outperform market cap–weighted… 

Towards the Estimation of an Efficient Benchmark Portfolio: The Case of Croatian Emerging Market

Abstract The fact that cap-weighted indices provide an inefficient risk-return trade-off is well known today. Various research approaches evolved suggesting alternative to cap-weighting in an effort

Should a skeptical portfolio insurer use an optimal or a risk-based multiplier?

Following recent evidence of out-of-sample stock market return predictability, the authors aim to evaluate whether the potential benefits suggested by asset allocation theory can actually be captured

Should a Skeptical Portfolio Insurer Use an Optimal or a Risk-Based Allocation?

Following recent evidence of out-of-sample stock market return predictability, the authors aim to evaluate whether the potential benefits suggested by asset allocation theory can actually be captured

Portfolio optimisation with higher moments of risk at the Pakistan Stock Exchange

Abstract Stock markets play an important role in spurring economic growth and development through diversification opportunities. However, diversification cannot be truly achieved if we continue to

Risk-Based Asset Allocation: A New Answer to an Old Question?

  • Wai Lee
  • Economics
    The Journal of Portfolio Management
  • 2011
In recent years, we have witnessed an alarmingly large and growing amount of literature on portfolio construction approaches focused on risks and diversification rather than on estimating expected

The Properties of Equally Weighted Risk Contribution Portfolios

Minimum-variance portfolios and equally weighted portfolios have recently prompted great interest from both academic researchers and market practitioners because their construction does not rely on

Application of semi-deviation as a proxy for the expected return estimation in the Croatian equity market

Abstract In the field of portfolio management the focus has been on the out-of-sample estimation of the covariance matrix mainly because the estimation of expected return is much more challenging.

Generalized Risk-Based Investing

Risk-based portfolio strategies - such as Minimum Variance, Maximum Diversification, Equally-Weighted and Risk Parity, to name the most famous - have become increasingly popular in the investment

The properties of equally-weighted risk contributions portfolios

Minimum variance and equally-weighted portfolios have recently prompted great interest both from academic researchers and market practitioners, as their construction does not rely on expected average

Robust Portfolio Allocation with Systematic Risk Contribution Restrictions

The standard mean-variance approach can imply extreme weights in some assets in the optimal allocation and a lack of stability of this allocation over time. To improve the robustness of the portfolio



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

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

Risk, Return, and Equilibrium: Empirical Tests

This paper tests the relationship between average return and risk for New York Stock Exchange common stocks. The theoretical basis of the tests is the "two-parameter" portfolio model and models of

Idiosyncratic Risk and Security Returns

The traditional CAPM approach argues that only market risk should be incorporated into asset prices and command a risk premium. This result may not hold, however, if some investors can not hold the

Stocks as Lotteries: The Implications of Probability Weighting for Security Prices

An improved cutoff tool comprising a tool body, a support blade clamped thereto, a stop member seated on the support blade, and a clamping member adapted to be secured to the tool body and overlie the support blades to provide added rigidity and extreme compactness.

Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection

In the presence of nonnormally distributed asset returns, optimal portfolio selection techniques require estimates for variance-covariance parameters, along with estimates for higher-order moments

The efficient market inefficiency of capitalization–weighted stock portfolios

35 A s of the end of 1990, the largest 200 prehensive cap-weighted portfolios occupy positions defined-benefit pension plans had indexed a combined total of approximately $200 billion to

Fundamental Indexation

A trillion-dollar industry is based on investing in or benchmarking to capitalization-weighted indexes, even though the finance literature rejects the mean–variance efficiency of such indexes. This

The Cost of Equity in Emerging Markets: A Downside Risk Approach (Ii)

Every company evaluating an investment project or an acquisition in an emerging market must not only estimate future cash flows but also an appropriate discount rate. Although not free from

Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation

In spite of theoretical benefits, Markowitz mean-variance (MV) optimized portfolios often fail to meet practical investment goals of marketability, usability, and performance, prompting many

Downside risk measures and equity returns in the NYSE

Although investors are concerned foremost with mean and variance, they are also sensitive to downside risk. In this article we employ several risk variables of traditional and downside risk measures