Reduce credit interest and save some money
What conclusions can be drawn from these observations? Portfolios that are optimized with regard to risk seem to do better than those that additionally rely on return forecasts. Sample means are not a good predictor for future returns of bond portfolios. In this context Jorion (1986) argues, that the sample mean is exposed to considerable estimation risk whereas variances and correlations are generally more stable over time. The high influence of the return vector on the weights of the tangency and equal risk portfolios can lead to extreme and volatile portfolio returns. Kallberg and Ziemba (1984) point out that errors in estimating future returns have a ten times higher impact on the out-of-sample performance of the optimized portfolio than errors in estimating the variance–covariance matrix. Similar conclusions apply when using adjusted value at risk or lower partial moments as a risk measure.
