Investigating the Efficiency of the 1/N Model in Portfolio Selection

Document Type : Research Paper

Authors

1 Prof., Department of Finance and Insurance, Faculty of Management, University of Tehran, Tehran, Iran.

2 Assistant Prof., Finance and Insurance Department, Faculty of Management, University of Tehran, Tehran, Iran

3 Ph.D. Candidate, Department of Finance and Insurance, Faculty of Management, University of Tehran, Tehran, Iran.

Abstract

Objective: Since Markowitz's (1952) pioneering work on a single-period investment model, mean-variance portfolio optimization problem has become a cornerstone of investment management in both academic and industrial fields. Despite the presence of various theories and methods, the  model continues to be considered in the portfolio selection, because it doesn`t need to estimate other parameters in optimization and computes simply. The objective of this study was to investigate the performance of Model  in the portfolio.
Methods:In this paper, various models and methods have been used to select the optimal portfolios and to evaluate the performance of the portfolio. At the end of the paper, the ELECTRE multi-criteria decision-making method has been used to rank the portfolio selection models. Portfolio selection models in this paper include  model, mean-variance model, minimum-variance model and composition of the minimum-variance model and  model. In this paper, various criteria such as Sharpe ratio, Trainer ratio, Modigliani and Modigliani ratio, Sortino ratio, Information ratio have been used to measure portfolio performance.
Results: Relatively, the performance of the  model was better in terms of Sharpe ratio and Modigliani and Modigliani ratio, the performance of the mean-variance model in terms of Trainer ratio, and the performance of the composition of the minimum-variance model and  model in terms of Sortino ratio and Information ratio.
Conclusion: Finally, the ELECTRE multi-criteria decision-making method has been used to rank the portfolio selection models. The results indicate that  model and minimum-variance model is superior to other models.

Keywords

References

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Financial Research Journal
Volume 23, Issue 1
2021
Pages 1-16

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