Abstract
In this chapter, following Elton et al. (Journal of Finance 31:1341–57, 1976; Modern portfolio theory and investment analysis, 7th edn. Wiley, New York, 2006), we introduce the performance-measure approaches to determine optimal portfolios. We find that the performance-measure approaches for optimal portfolio selection are complementary to the Markowitz full variance-covariance method and the Sharpe index-model method. The economic rationale of the Treynor method is also discussed in detail.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Since the ratio of Equation (8.3) is homogeneous of degree zero with respect to W i . In other words, the ratio L is unchanged by any proportionate change in the weight of W i .
- 2.
Elton et al. (2006).
- 3.
If the beta coefficient β i for ith security is positive, then the size of H i depends on the sign of the term in parentheses. Therefore, if a security with a particular \(\left ({\overline{R}}_{i} - {R}_{f}\right )\left /\right. {\beta}_{i}\) is included in the optimum portfolio, all securities with a positive beta that have higher values of \(\left ({\overline{R}}_{i} - {R}_{f}\right )\left /\right. {\beta}_{i}\) must be included in the optimum portfolio.
- 4.
This set of data has been analyzed in later chapters. The names of these 30 firms can be found in Table 19.1.
References
Alexander, G. J. and B. J. Resnick. 1985. “More on estimation risk and single rule for optimal portfolio selection.” Journal of Finance 40, 125–134.
Bodie, Z., A. Kane, and A. Marcus. 2006. Investments, 7th Edition, McGraw-Hill, New York.
Chen, S. N. and S. J. Brown. 1983. “Estimation risk and simple rules for optimal portfolio selection.” Journal of Finance 38, 1087–1093.
Cheung, C. S. and C. C. Y. Kwan. 1988. “A note on simple criteria for optimal portfolio selection.” Journal of Finance 43, 241–245.
Elton, E. J., M. J. Gruber, and M. W. Padberg. 1976. “Simple criteria for optimal portfolio selection.” Journal of Finance 31, 1341–1357.
Elton, E. J., M. J. Gruber, S. J. Brown, and W. N. Goetzmann. 2006. Modern portfolio theory and investment analysis, 7th Edition, Wiley, New York.
Kwan, C. C. Y. 1984. “Portfolio analysis using single index, multi-index, and constant correlation models: a unified treatment.” Journal of Finance 39, 1469–1483.
Lee, C. F. and A. C. Lee. 2006. Encyclopedia of finance. Springer, New York.
Lee, C. F., J. C. Lee, and A. C. Lee. 2000. Statistics for business and financial economics, World Scientific Publishing Co, Singapore.
Lintner, J. 1965. “The valuation of risk asset on the selection of risky investments in stock portfolio and capital budgets.” The Review of Economics and Statistics 57, 13–37.
Maginn, J. L., D. L. Tuttle, J. E. Pinto, and D. W. McLeavey. 2007. Managing investment portfolios: a dynamic process, CFA Institute Investment Series, 3rd Edition, Wiley, Hoboken, NJ.
Markowitz, H. 1952. “Portfolio selection.” Journal of Finance 7, 77–91.
Markowitz, H. 1959. Portfolio selection: efficient diversification of investments, Wiley, New York.
Sharpe, W. F. 1963. “A simplified model for portfolio analysis.” Management Science 9, 277–293.
Sharpe, W. F. 1964. “Capital asset prices: a theory of market equilibrium under conditions of risk.” Journal of Finance 19, 425–442.
Wackerly, D., W. Mendenhall, and R. L. Scheaffer. 2007. Mathematical statistics with applications, 7th Edition, Duxbury Press, California.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2010 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Lee, CF., Chen, HY., Mai, J.SY. (2010). Performance-Measure Approaches for Selecting Optimum Portfolios. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_8
Download citation
DOI: https://doi.org/10.1007/978-0-387-77117-5_8
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-77116-8
Online ISBN: 978-0-387-77117-5
eBook Packages: Business and EconomicsEconomics and Finance (R0)