Retail spending in the US jumped 0.6% in July, delivering an encouraging rebound from the previous month’s flat performance. The monthly gain could be noise, of course, but the sight of the year-over-year trend reviving as well suggests that consumer spending may be stabilizing, albeit at a lower level of growth compared with the peaks in recent history.
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Momentum and Markowitz: A Golden Combination
Wouter J. Keller, Adam Butler, and Ilya Kipnis
May 16, 2015
Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is “an unstable and error-maximizing” procedure (Michaud 1989), and “is nearly always beaten by simple 1/N portfolios” (DeMiguel, 2007)… In our opinion, MVO is a great concept, but previous studies were doomed to fail because they allowed for short-sales, and applied poorly specified estimation horizons… In this paper we apply short lookback periods (maximum of 12 months) to estimate MVO parameters in order to best harvest the momentum factor. In addition, we will introduce common-sense constraints, such as long-only portfolio weights, to stabilize the optimization. We also introduce a public implementation of Markowitz’s Critical Line Algorithm (CLA) programmed in R to handle the case when the number of assets is much larger than the number of lookback periods. We call our momentum-based, long-only MVO model Classical Asset Allocation (CAA) and compare its performance against the simple 1/N equal weighted portfolio using various global multi-asset universes over a century of data (Jan 1915-Dec 2014). At the risk of spoiling the ending, we demonstrate that CAA always beats the simple 1/N model by a wide margin.
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● US job openings fall in June
● US weekly mortgage applications inch higher
● Is the Fed laying the groundwork for recession?
● China’s central bank: no reason for further currency declines
● Greek surprise: economic growth in Q2