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A comparison of minimum variance and maximum Sharpe ratio portfolios for mainstream investors

Anja Vinzelberg (Brandenburg University of Technology Cottbus-Senftenberg, Cottbus, Germany) (University of Leipzig, Leipzig, Germany) (CESifo Munich, Munich, Germany)
Benjamin Rainer Auer (Brandenburg University of Technology Cottbus-Senftenberg, Cottbus, Germany) (University of Leipzig, Leipzig, Germany) (CESifo Munich, Munich, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 10 January 2022

Issue publication date: 14 January 2022

298

Abstract

Purpose

Motivated by the recent theoretical rehabilitation of mean-variance analysis, the authors revisit the question of whether minimum variance (MinVar) or maximum Sharpe ratio (MaxSR) investment weights are preferable in practical portfolio formation.

Design/methodology/approach

The authors answer this question with a focus on mainstream investors which can be modeled by a preference for simple portfolio optimization techniques, a tendency to cling to past asset characteristics and a strong interest in index products. Specifically, in a rolling-window approach, the study compares the out-of-sample performance of MinVar and MaxSR portfolios in two asset universes covering multiple asset classes (via investable indices and their subindices) and for two popular input estimation methods (full covariance and single-index model).

Findings

The authors find that, regardless of the setting, there is no statistically significant difference between MinVar and MaxSR portfolio performance. Thus, the choice of approach does not matter for mainstream investors. In addition, the analysis reveals that, contrary to previous research, using a single-index model does not necessarily improve out-of-sample Sharpe ratios.

Originality/value

The study is the first to provide an in-depth comparison of MinVar and MaxSR returns which considers (1) multiple asset classes, (2) a single-index model and (3) state-of-the-art bootstrap performance tests.

Keywords

Acknowledgements

The authors thank an anonymous reviewer for valuable comments and suggestions.

Citation

Vinzelberg, A. and Auer, B.R. (2022), "A comparison of minimum variance and maximum Sharpe ratio portfolios for mainstream investors", Journal of Risk Finance, Vol. 23 No. 1, pp. 55-84. https://doi.org/10.1108/JRF-02-2021-0021

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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