Journal Article10.2139/SSRN.900972
Making Markowitz's Portfolio Optimization Theory Practically Useful
TL;DR: In this article, the authors show that the traditional estimated return for the Markowitz mean-variance optimization has been demonstrated to seriously depart from its theoretic optimal return, and they further develop new bootstrap-corrected estimations for the optimal return and its asset allocation and prove that these bootstrap corrected estimates are proportionally more consistent with their theoretic counterparts.
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Abstract: The traditional estimated return for the Markowitz
mean-variance optimization has been demonstrated to seriously depart from its theoretic optimal return. We prove that this phenomenon is natural and the estimated optimal return is always $\sqrt{\gamma}$ times larger than its theoretic counterpart where $\gamma = \frac 1{1-y}$ with $y$ as the ratio of the dimension to sample size. Thereafter, we develop new bootstrap-corrected estimations for the optimal return and its asset allocation and prove
that these bootstrap-corrected estimates are proportionally
consistent with their theoretic counterparts. Our theoretical results are further confirmed by our simulations, which show that the essence of the portfolio analysis problem could be adequately captured by our
proposed approach. This greatly enhances the practical uses of the Markowitz mean-variance optimization procedure.
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