The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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More on Estimation Risk and Simple Rules for Optimal Portfolio Selection
Published: 03/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04940.x
GORDON J. ALEXANDER, BRUCE G. RESNICK
For the risk‐averse investor, consideration of estimation risk is important in selecting an expected‐utility‐maximizing portfolio. It has previously been shown that the composition of the tangency portfolio is unaffected by the recognition of estimation risk if the Full Covariance Model is used. Alternatively, if the Market Model is used, the composition of the tangency portfolio has been shown to be affected by the recognition of estimation risk. However, as is demonstrated in this paper, the effect will generally not be as substantive as previously believed and in many situations can be safely ignored.
Estimating the Correlation Structure of International Share Prices
Published: 12/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb04909.x
CHEOL S. EUN, BRUCE G. RESNICK
Recently, the case for international portfolio diversification has been convincingly argued in the framework of mean‐variance portfolio analysis by a number of researchers. However, virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices. In this paper, 12 models for estimating the international correlation matrix are presented and empirically tested relative to full historical extrapolation. The major evaluation criteria are the mean squared error and stochastic dominance based on the frequency distribution of the squared forecast errors. The results indicate that the National Mean Model strictly dominates all the others in terms of forecasting accuracy.
Exchange Rate Uncertainty, Forward Contracts, and International Portfolio Selection
Published: 03/01/1988 | DOI: 10.1111/j.1540-6261.1988.tb02597.x
CHEOL S. EUN, BRUCE G. RESNICK
In this paper, ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates. It is shown that exchange rate uncertainty is a largely nondiversifiable factor adversely affecting the performance of international portfolios. Therefore, it is essential to effectively control exchange rate volatility. For that purpose, two methods of exchange risk reduction are simultaneously employed: multicurrency diversification and hedging via forward exchange contracts. The empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the U.S. domestic portfolio in out‐of‐sample periods.