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Primary Article

Parameter Estimation Techniques, Optimization Frequency, and Portfolio Return Enhancement

Glen A. Larsen and Bruce G. Resnick
The Journal of Portfolio Management Summer 2001, 27 (4) 27-34; DOI: https://doi.org/10.3905/jpm.2001.319810
Glen A. Larsen Jr.
Chairperson of the undergraduate program and associate professor of finance at the Kelley School of Business at Indiana University in Indianapolis (IN 46202).
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Bruce G. Resnick
The Joseph M. Bryan Jr. professor of banking and finance at the Babcock Graduate School of Management at Wake Forest University in Winston-Salem (NC 27109).
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Abstract

Modern portfolio theory dictates that the lower the pairwise correlation between securities, the greater the potential for efficiency enhancement from ex ante optimization. When securities exhibit a high degree of pairwise correlation, ex ante optimization should provide less potential for efficiency enhancement. It is an empirical issue as to whether ex ante return estimation and optimization techniques can provide strict return enhancement in risk–return space. Strict return enhancement, without the use of leverage, may be possible if ex ante portfolio parameter estimation techniques allow securities with higher realized returns to carry greater weights in the ex ante optimal portfolio than in the benchmark portfolio. The authors of this article examine how various ex ante portfolio parameter estimation techniques and optimization/holding–period frequency intervals can enhance managed portfolio returns. Overall, the results suggest that it is possible to consistently achieve enhanced returns at much the same level of return per unit of risk as the benchmark portfolio.

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The Journal of Portfolio Management
Vol. 27, Issue 4
Summer 2001
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Parameter Estimation Techniques, Optimization Frequency, and Portfolio Return Enhancement
Glen A. Larsen, Bruce G. Resnick
The Journal of Portfolio Management Jul 2001, 27 (4) 27-34; DOI: 10.3905/jpm.2001.319810

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Parameter Estimation Techniques, Optimization Frequency, and Portfolio Return Enhancement
Glen A. Larsen, Bruce G. Resnick
The Journal of Portfolio Management Jul 2001, 27 (4) 27-34; DOI: 10.3905/jpm.2001.319810
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