Abstract

After the publication of H.M. Markowitz's article and monograph on portfolio selection, there have been a number of efforts to simplify the procedures for estimating an efficient portfolio and several studies, which indicate that there may be some degree of predictive content to portfolios that are obtained from historical data. Recently J.L. Treynor and others have shown that the risk parameters for stocks in one mutual fund have exhibited remarkable stability. They were able to use historical parameters to explain about half of the month-to-month variation in the price of this fund, relative to a market average, over a two-year period. The implication is that if the direction of the market can be predicted, it should be possible to select a portfolio that will outperform a representative market average. A simplified portfolio balance model is used here to obtain a reasonably efficient portfolio to combine with a safe asset yielding four percent in the period 1947 to 1965. One of the more interesting findings to emerge from this study was the discovery that it is not easy to identify defensive securities using standard statistical techniques.