Abstract
This paper reconciles the ‘mean-variance (MV) vs equal-weighting (1/N)’ performance debate using an unbiased performance-to-error map and delineates thresholds where subjective interventions become essential to surpass MV optimisation. Traditional evaluations often yield inconclusive or contradictory results due to a ‘joint-test’ problem entangled with alpha and risk models. We introduce a methodology that isolates portfolio selection, through which we objectively assess performance sensitivity to estimation errors, identify when MV becomes suboptimal, and explore why appropriate subjectivity can enhance performance beyond MV. These findings underscore the importance of structurally incorporating subjectivity and rational investor behaviours into portfolio theory and practice.
Original language | English |
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Publisher | SSRN |
Publication status | Published - 2024 |