Mean-variance analysis

Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.

Mean-Variance Analysis

The process of portfolio selection that assumes that every rational investor, at a given level of risk, will accept only the largest expected return. More specifically, mean-variance analysis attempts to account for risk and expected return mathematically to help the investor find a portfolio with the maximum return for the minimum about of risk. A Markowitz efficient porfolio represents just that: the most expected return at a given amount of risk (sometimes excluding zero risk). Harry Markowitz first began developing this form of analysis in an article published in 1952 and received the Nobel prize for economics for his work in 1990. See also: Homogenous expectations assumption, Markowitz efficient set of portfolios.
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With the insight that traditional mean-variance analysis measures of risk are not sufficient for diversification during, for example, market crashes, the Ziembas demonstrate how investors fail to diversify enough, describe the incentives in both directions, unpack rewards and dangers, and analyze results of a range of potential outcomes.
According to EDHEC, this is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis.
They also find that it is only when improved estimators are used that portfolio selection with higher order moments consistently dominates mean-variance analysis from an out-of-sample perspective.
These accounting and performance measurements go beyond traditional mean-variance analysis, recognizing the need to understand the often non-normally distributed return behavior of private equity, hedge funds and real estate," said Christopher Mullooly, product manager for Investment Risk and Analytical Services at Northern Trust.
In addition, mean-variance analysis treats financial wealth in isolation from income.
An important difficulty with mean-variance analysis becomes clear when one considers the classic problem of allocating a portfolio among three broad asset classes: stocks, bonds, and money market funds ("cash").
Mean-Variance Analysis in Portfolio Choice and Capital Markets, New York: Basil Blackwell.
The results of mean-variance analysis are often presented in the context of the efficient frontier, which shows expected portfolio return as a strict function of risk (Figure 1).
There are few acceptable alternatives to mean-variance analysis, and it is commonly used throughout the investment-management business by brokerage firms, mutual funds, financial managers, and professionals responsible for institutional asset management.
We find that, contrary to recent Government policy and the results from a simple mean-variance analysis, the welfare-maximising policy requires that all public debt be denominated in foreign currency.
Using a mean-variance analysis, we find that Treasury should issue only domestic debt.
Focuses on classical static mean-variance analysis and portfolio immunization, scenario-based models, multi-period dynamic portfolio optimization, and the relationships between classes of models