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Understanding the outperformance of the minimum variance portfolio

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  • Bednarek, Ziemowit
  • Patel, Pratish

Abstract

Minimum variance portfolio (MVP) seems to outperform the mean-variance optimized portfolio on a risk-adjusted basis. Scherer (2011) conjectures that the MVP tilts toward low beta and low idiosyncratic risk assets. Consequently, the MVP capitalizes on both the beta anomaly and the idiosyncratic risk anomaly. By providing a counter-example, Yanushevsky and Yanushevsky (2015) show that the proof of the conjecture is incomplete. In this article, we provide conditions under which Scherer (2011) conjecture remains valid. Specifically, we show that the counter-example in Yanushevsky and Yanushevsky (2015) represents a knife-edge case. We also analytically identify the MVP weight sign.

Suggested Citation

  • Bednarek, Ziemowit & Patel, Pratish, 2018. "Understanding the outperformance of the minimum variance portfolio," Finance Research Letters, Elsevier, vol. 24(C), pages 175-178.
    • Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:175-178
    DOI: 10.1016/j.frl.2017.09.005
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    References listed on IDEAS

    as
    1. Chiu, Wan-Yi & Jiang, Ching-Hai, 2016. "On the weight sign of the global minimum variance portfolio," Finance Research Letters, Elsevier, vol. 19(C), pages 241-246.
    2. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    5. Scherer, Bernd, 2011. "A note on the returns from minimum variance investing," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 652-660, September.
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    Cited by:

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    5. Arezoo Mohammadi & Mehrzad Minnoei & Zadollah Fathi & Mohamamd Ali Keramati & Hossein Baktiari, 2022. "Optimal allocation of bank resources and risk reduction through portfolio decentralization," International Journal of Economic Sciences, European Research Center, vol. 11(2), pages 92-143, November.

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    More about this item

    Keywords

    Minimum variance portfolio; Market portfolio; Bet against beta; Pricing anomaly;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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