Value weighting and simple optimization of portfolios: an empirical examination

Reviews the previous research on the management of portfolio investment and compares the performance of a typical small investor’s portfolio of nine popular stocks (optimized portfolio) with a value‐weighted portfolio (VW), using 1992‐1997 US data. Explains how the portfolios were derived on a rolling basis from the previous 30 months’ data, using four risk levels for the optimized portfolios (OPs). Shows that as risk aversion increases for OPs, minimum returns tend to decrease but average returns increase; but that VW provides superior returns with less volatility. Considers the underlying reasons for the results, concludes that diversification is important even when small numbers of stocks are involved; and suggests some avenues for further research.