The relevance of the distributional form of common stock returns to the construction of optimal portfolios

George M. Frankfurter, Christopher G Lamoureux

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

In this paper, we compare the robustness in application of the Gaussian assumption of security return distributions to the robustness of the general stable assumption. Using actual stock return data to simulate the “real world,” a stock market is constructed in which stock returns conform to a Gaussian distribution as well as to a stable Pareto-Levy distribution. Using these two sets of stock returns, efficient frontiers are generated under both assumptions of parametric environments. It is shown that the Gaussian assumption, and its incumbent statistical techniques, is preferable to the general stable assumption.

Original languageEnglish (US)
Pages (from-to)505-511
Number of pages7
JournalJournal of Financial and Quantitative Analysis
Volume22
Issue number4
DOIs
StatePublished - 1987
Externally publishedYes

Fingerprint

Stock returns
Optimal portfolio
Robustness
Incumbents
Pareto
Return distribution
Stock market
Security returns
Efficient frontier

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

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