K-fold cross validation performance comparisons of six naive portfolio selection rules: how naive can you be and still have successful out-of-sample portfolio performance?

K-fold cross validation performance comparisons of six naive portfolio selection rules: how naive... Recent research reports that optimal portfolio selection models often perform worse than equal-weight naive diversification in out-of-sample testing. This paper extends this line of inquiry by comparing the out-of-sample performance of the equal-weight naive strategy to the out-of-sample performance of five alternative naive strategies, each of which derives from a simple heuristic that does not require any optimization. Out-of-sample portfolio performance is assessed by mean, standard deviation, skewness, and Sharpe ratio; k-fold cross validation is used as the out-of-sample testing mechanism. The results indicate that the proposed naive heuristic rules exhibit strong out-of-sample performance, in most cases superior to the equal-weight naive strategy. These findings are consequential for at least two reasons: first, if these simple heuristic-based rules outperform the equal-weight naive strategy, then by transitivity they can outperform the mean–variance- and shortfall-optimal portfolio rules that have been shown in the literature to be inferior to the equal-weight naive rule, which further emphasizes the out-of-sample fragility of “optimal” methods; and second, among naive diversification strategies, some appear more robust in out-of-sample testing than others, hence the proposed methods may be useful when forming mixed portfolio selection models wherein a naive strategy is combined with an optimal strategy to improve performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annals of Finance Springer Journals

K-fold cross validation performance comparisons of six naive portfolio selection rules: how naive can you be and still have successful out-of-sample portfolio performance?

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2017 by Springer-Verlag GmbH Germany
Subject
Finance; Finance, general; Economic Theory/Quantitative Economics/Mathematical Methods; Quantitative Finance; Macroeconomics/Monetary Economics//Financial Economics
ISSN
1614-2446
eISSN
1614-2454
D.O.I.
10.1007/s10436-017-0301-4
Publisher site
See Article on Publisher Site

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