25 Dec

Random Portfolios: Practice and Theory

Main points:

  • the history of random portfolios extends at least to Chicago 1965
  • testing a fund versus a benchmark takes many years to get reasonable statistical power
  • a benchmark will be easier to beat some years versus others
  • peer groups depend on the fantasy that there is little noise in the rankings of the peers
  • there are open probability questions about random portfolios
  • random portfolios are sometimes used like the statistical bootstrap, sometimes like a random permutation test

annotated slides (pdf)

Presented 2009 April at the R/Finance Conference

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