Univariate and Cross-Sectional Ranks of Asset Returns: Are They Relevant to Portfolio Allocation?

Description

The term asset allocation has a broad meaning consisting of an individual’s activities of searching for asset types and their properties to construct a portfolio that will best suit his/her preferences under different states of the world as well as uncertainty. The mean – variance model proposed by Markowitz constitutes the backbone of portfolio asset allocation literature in finance, including most of the industry applications and the further scientific developments. Albeit its popularity, the mean – variance model is highly criticized. There is a vast literature in finance trying to improve the predictions of the mean – variance model or propose new methods / strategies that can be employed in portfolio asset allocation tasks. While the first chapter of this book reviews the traditional theory, the rest of the chapters are focused on the question of whether asset ranks (univariate and/or cross-sectional ranks of returns) are relevant to portfolio asset allocation. Chapter 2 reports the findings of extensive research on the studies contributed to the finance literature by using ranks. The last chapter employs a recently developed portfolio allocation strategy using ranks.