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The distribution of the sample minimum-variance frontier

Kan, R. & Smith, D. R. (2008) The distribution of the sample minimum-variance frontier. Management Science, 54(7), pp. 1364-1380.

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Abstract

In this paper, we present a finite sample analysis of the sample minimum-variance frontier under the assumption that the returns are independent and multivariate normally distributed. We show that the sample minimum-variance frontier is a highly biased estimator of the population frontier, and we propose an improved estimator of the population frontier. In addition, we provide the exact distribution of the out-of-sample mean and variance of sample minimum-variance portfolios. This allows us to understand the impact of estimation error on the performance of in-sample optimal portfolios.

Key Words: minimum-variance frontier; efficiency set constants; finite sample distribution

Impact and interest:

15 citations in Scopus
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10 citations in Web of Science®

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ID Code: 31041
Item Type: Journal Article
DOI: 10.1287/mnsc.1070.0852
ISSN: 0025-1909
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Institute for Operations Research and the Management Sciences (INFORMS)
Deposited On: 23 Feb 2010 15:49
Last Modified: 29 Feb 2012 23:56

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