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Estimation Risk in the Portfolio Selection Model: A Comment

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  • Frankfurter, George M.
  • Phillips, Herbert E.
  • Seagle, John P.

Abstract

Professor Basil Kalymon, in his recent article [1], correctly asserts that the appropriate variance for the portfolio selection model, reflecting portfolio risk, should measure the risks created “not only by the inherent fluctuations of returns, but also by the decision-maker's lack of perfect information about the parameters of his model” [1, p. 560]. He identifies a significant failing of portfolio selection models, that “the question of estimating the required parameters in the models has been largely sidestepped … by assuming that the parameter values are known” [1, p. 559]. By showing that error in estimating security returns is an important component of risk in portfolio selection models, Professor Kalymon has taken portfolio theory an important step forward.

Suggested Citation

  • Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1972. "Estimation Risk in the Portfolio Selection Model: A Comment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(1), pages 1423-1424, January.
    • Handle: RePEc:cup:jfinqa:v:7:y:1972:i:01:p:1423-1424_01
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    Cited by:

    1. Leonidas Sandoval Junior & Adriana Bruscato & Maria Kelly Venezuela, 2012. "Building portfolios of stocks in the S\~ao Paulo Stock Exchange using Random Matrix Theory," Papers 1201.0625, arXiv.org, revised Mar 2013.
    2. Sandoval, Leonidas Junior & Bruscato, Adriana & Venezuela, Maria Kelly, 2012. "Building portfolios of stocks in the São Paulo Stock Exchange using Random Matrix Theory," Insper Working Papers wpe_270, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    3. McGoun, Elton G., 1997. "Ex ungue leonem," International Review of Financial Analysis, Elsevier, vol. 6(1), pages 1-12.

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