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Asset ManagementA Systematic Approach to Factor Investing$
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Andrew Ang

Print publication date: 2014

Print ISBN-13: 9780199959327

Published to Oxford Scholarship Online: August 2014

DOI: 10.1093/acprof:oso/9780199959327.001.0001

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Mean-Variance Investing

Mean-Variance Investing

Chapter:
(p.71) Chapter 3 Mean-Variance Investing
Source:
Asset Management
Author(s):

Andrew Ang

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199959327.003.0003

Mean-variance investing is all about diversification. By exploiting the interaction of assets with each other, so one asset’s gains can make up for another asset’s losses, diversification allows investors to increase expected returns while reducing risks. In practice, mean-variance portfolios that constrain the mean, volatility, and correlation inputs to reduce sampling error have performed much better than unconstrained portfolios. These constrained special cases include equal-weighted, minimum variance, and risk parity portfolios.

Keywords:   diversification, mean-variance frontier, capital allocation line, mean-variance efficient, tangency portfolio, free lunch, socially responsible investing, risk parity, minimum variance, estimation risk, home bias, stock nonparticipation puzzle

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