Identifying securities to buy: The heuristic ri

Abstract

In this study, we analyze the power of the individual return-to-volatility security performance heuristic (ri/stdi) to simplify the identification of securities to buy and, consequently, to form the optimal no short sales mean–variance portfolios. The heuristic ri/stdi is powerful enough to identify the long and shorts sets. This is due to the positive definiteness of the variance–covariance matrix – the key is to use the heuristic sequentially. At the investor level, the heuristic helps investors to decide what securities to consider first. At the portfolio level, the heuristic may help us find out whether it is a good idea to invest in equity to begin with. Our research may also help to integrate individual security analysis into portfolio optimization through improved security rankings.

Citation

Tarrazo, M. (2009), "Identifying securities to buy: The heuristic ri", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 229-268. https://doi.org/10.1108/S0196-3821(2009)0000025011