Parameter estimation techniques, optimization frequency, and portfolio return enhancement

Modern portfolio theory dictates that the lower the pairwise correlation be tween securities, the greater the potential for efficiency enhancement from ex ante optimization. When securities exhibit a high degree of pairwise co rrelation, ex ante optimization should provide less potential for efficienc y enhancement. It is an empirical issue as to whether ex ante return estima tion and optimization techniques can provide strict return enhancement in r isk-return space. Strict return enhancement, without the use of leverage, m ay be possible if ex ante portfolio parameter estimation techniques allow s ecurities with higher realized returns to carry greater weights in the ex a nte optimal portfolio than in the benchmark portfolio. The authors of this article examine how various ex ante portfolio parameter estimation techniqu es arid optimization/holding-period frequency intervals can enhance managed portfolio returns. Overall, the results suggest that it is possible to con sistently achieve enhanced returns at much the same level of return per uni t of risk as the benchmark portfolio.