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.
Thus, we use mean-variance analysis
to determine the optimal mix of stocks and bonds in a portfolio for a given holding period and compare the percentage of equities to that actually held in five popular target retirement funds: Fidelity, Principal, T.
According to EDHEC, this is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis
Ritchken, 1985, "Enhancing Mean-Variance Analysis
with Options", Journal of Portfolio Management, 11:67-71
In addition, mean-variance analysis
treats financial wealth in isolation from income.
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).
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.
However, the usefulness of mean-variance analysis
as a computable approximation to full EU analysis was defended vigorously, especially by Tobin (1969) (see Borch (1969), Feldstein (1969) and Tobin (1969)).
Furlong, 1990, "A Reexamination of Mean-Variance Analysis
of Bank Capital Regulation", Journal of Banking and Finance, 14:69-84
Thanks to the property that a linear transformation of ellipticals of the same family is still elliptical of the same family, the mean-variance analysis
can be generalized to non-normal, fat-tailed portfolios.