Dr. Charlie Boynton

"Allocations for Optimal Portfolios When There is Estimation Error"
Wednesday, November 12, 2014 at 2:00 p.m. Marvin K. Peterson Library, Upper Level


Empirical tests show poor out-of-sample performance of the Mean-Variance (MV) model. This paper reports on how estimation errors create distortions to MV Sharpe ratios. Tests trace the effects of estimation errors through the MV computations and show their influence at each stage of the computations. The paper shows two ways that estimation errors may cause problems. First, positive correlations among the assets may magnify estimation errors. Second, the standardizing scalar (that rescales the non-standardized solution weights so they sum to one) may become quite small and setup a fragile system sensitive to small changes in the moment estimates. The standardizing scalar has influence on the stability of the MV system. In the presence of estimation error, the moments, the non-standardized weights, and the standardized weights are random variables. The paper shows that the standardized weights are Cauchy random variables. As the standardizing scalar becomes small, the predictive distribution may degenerate. The paper provides a toolbox to diagnose and navigate estimation-error problems and evaluate the sensitivity of the data set to estimation-error distortions.

Biographical Information

Ph.D., University of Rhode Island (Finance), 2000

A.M., Brown University (Economics), 1992

M.A., University of Rhode Island (Economics), 1992

M.B.A. University of Rhode Island (Management), 1991

B.A. Colby College (Philosophy), 1972

Professional Degree: Certified Public Accountant, Maine 1980

Chief Financial Officer: VNA of Rhode Island, 1985-1989- Responsible for financing and accounting for 5 corporate division conglomerate. Managed the startup and financing for 3 of new divisions.

Senior Research Associate: Rhode Island Health Services Research, 1980-1985-Responsible for evaluation of post market evaluations of drugs. Other disease studies included a publication in the American Journal of Public Health.

Associate Accountant: Cooney, Lee and Libby, CPA’s, Portland Maine, 1978-1980 -Responsible for health care consulting and tax planning.

Associate staff: Department of Health and Human Services, Augusta, Maine, 1975-1978


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