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Bayes-Stein Estimation for Portfolio Analysis

Published online by Cambridge University Press:  06 April 2009

Philippe Jorion
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Abstract

In portfolio analysis, uncertainty about parameter values leads to suboptimal portfolio choices. The resulting loss in the investor's utility is a function of the particular estimator chosen for expected returns. So, this is a problem of simultaneous estimation of normal means under a well-specified loss function. In this situation, as Stein has shown, the classical sample mean is inadmissible. This paper presents a simple empirical Bayes estimator that should outperform the sample mean in the context of a portfolio. Simulation analysis shows that these Bayes-Stein estimators provide significant gains in portfolio selection problems.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 21 , Issue 3 , September 1986 , pp. 279 - 292
Copyright
Copyright © School of Business Administration, University of Washington 1986

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References

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