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An Empirical Study of Time-Varying Return Correlations and the Efficient Set of Portfolios

  • Thadavillil Jithendranathan
Part of the Finance and Capital Markets Series book series (FCMS)

Abstract

Modern portfolio theory was first introduced in 1952 (Markowitz, 1952), and since then it has been the mainstay of asset allocation models. In the mean-variance paradigm of Markowitz, an efficient set of portfolios is estimated by maximizing the expected return of the portfolio and minimizing its risk, as measured by the standard deviation. For practical purposes, efficient portfolio construction requires estimation of expected returns and variances of expected returns of individual assets in the portfolio, as well as the covariance matrix of the asset returns. The most widely used method of estimating these inputs into a portfolio model is to use the past return data for a period of five years and use the historic average values of returns, variances and co-variances as proxies for expected values. One of the implicit assumptions in this method of efficient portfolio construction is that the variances and co-variances are time-invariant during the holding period of the portfolio (Jobson and Korkie, 1981).

Keywords

Asset Return GARCH Model Post Return Rolling Window Exxon Mobil 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Thadavillil Jithendranathan 2007

Authors and Affiliations

  • Thadavillil Jithendranathan

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