IDEAS home Printed from https://ideas.repec.org/a/spr/mathme/v56y2003i3p501-511.html
   My bibliography  Save this article

New light on the portfolio allocation problem

Author

Listed:
  • R. A. Maller
  • D. A. Turkington

Abstract

The basics of the mean-variance portfolio optimisation procedure have been well understood since the seminal work of Markowitz in the 1950's. A vector x of asset weights, restricted only by requiring its components to add to 1, is to be chosen so that the linear combination μ p =x ′ μ of the expected asset returns μ (or, expected excess returns), which represents the expected return on a portfolio, is maximised for a specified level of “risk”, σ p , the standard deviation of the portfolio. The efficient frontier is the curve traced out in (μ p , σ p ) space by portfolios whose return/risk tradeoff is optimal in this sense. The portfolio with the maximum Sharpe ratio is the portfolio with the highest return/risk tradeoff achievable from the assets, and under some conditions can be obtained as the point of tangency of a line from the origin to the efficient frontier, as is well known. But when the tangency approach fails, which it commonly can, the question arises as to the maximum Sharpe ratio achievable from the assets. This problem, which has not been dealt with before, is solved explicitly in this paper, and the corresponding optimal portfolio found. The suggested procedure is easily implemented when the usual inputs – estimates of mean excess returns and their covariance matrix – are available. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • R. A. Maller & D. A. Turkington, 2003. "New light on the portfolio allocation problem," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 56(3), pages 501-511, January.
    • Handle: RePEc:spr:mathme:v:56:y:2003:i:3:p:501-511
    DOI: 10.1007/s001860200211
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s001860200211
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s001860200211?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ekaterina Seregina, 2020. "A Basket Half Full: Sparse Portfolios," Papers 2011.04278, arXiv.org, revised Apr 2021.
    2. Yuanyao Ding & Bo Zhang, 2009. "Risky asset pricing based on safety first fund management," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 353-361.
    3. Zhihui Lv & Amanda M. Y. Chu & Wing Keung Wong & Thomas C. Chiang, 2021. "The maximum-return-and-minimum-volatility effect: evidence from choosing risky and riskless assets to form a portfolio," Risk Management, Palgrave Macmillan, vol. 23(1), pages 97-122, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:mathme:v:56:y:2003:i:3:p:501-511. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.