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Shortfall minimization and the Naive (1/N) portfolio: an out-of-sample comparison

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  • M. Ryan Haley

Abstract

Naive portfolio selection, wherein an investor allocates an equal portion of their wealth to the field of candidate assets, is a simple ad-hoc way to create a portfolio. Naive portfolio selection contrasts to the many sophisticated portfolio selection rules that are optimal with respect to a specific portfolio allocation objective and which often perform well in sample. However, some recent research finds that many of these ‘optimal’ portfolio allocation mechanisms perform no better than naive diversification in out-of-sample data. This paper extends this line of inquiry by comparing the out-of-sample performance of naive portfolio selection to several recently developed shortfall-minimizing portfolio selection methods. The results corroborate the prior findings that optimal portfolio methods struggle to beat the naive portfolio in out-of-sample environments.

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  • M. Ryan Haley, 2016. "Shortfall minimization and the Naive (1/N) portfolio: an out-of-sample comparison," Applied Economics Letters, Taylor & Francis Journals, vol. 23(13), pages 926-929, September.
    • Handle: RePEc:taf:apeclt:v:23:y:2016:i:13:p:926-929
    DOI: 10.1080/13504851.2015.1119788
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    References listed on IDEAS

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    1. Michael Stutzer, 2011. "Portfolio choice with endogenous utility: a large deviations approach," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 43, pages 619-640, World Scientific Publishing Co. Pte. Ltd..
    2. M. Ryan Haley & Harry J. Paarsch & Charles H. Whiteman, 2013. "Smoothed safety first and the holding of assets," Quantitative Finance, Taylor & Francis Journals, vol. 13(2), pages 167-176, January.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. M. Ryan Haley & Charles Whiteman, 2008. "Generalized Safety First and a New Twist on Portfolio Performance," Econometric Reviews, Taylor & Francis Journals, vol. 27(4-6), pages 457-483.
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    Cited by:

    1. Jules Sadefo Kamdem, 2023. "Risk-Adjusted Performance And Semi-Moments Of Non-Gaussian Portfolio Returns Distributions," Working Papers hal-04134833, HAL.

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