Evaluation of Various Covariance Matrix Estimators for use with

Portfolio Optimization

Robert Cerff (24124863)

James Eun (24125181)
Geoff Simmons (24728958)
Alex Smith (24124894)

August 9, 2013

Abstract

Modern portfolio theory has allowed portfolio managers to minimize risk using
mean-variance optimization. The inputs to this process are two-fold: the expected
returns of the stocks in the portfolio and the covariance matrix of returns. Due
to the number of stocks typically used in constructing portfolios and the lim-
ited amount of time series data for returns, it has been well documented that
constructing sample covariance matrices typically introduces significant sampling
error. To make things worse, these errors often dictate taking extreme long and
short positions. Jagannathan and Ma (2003) and Ledoit and Wolf (2003) examine
this phenomenon and recommend fixing these errors through a concept dubbed
”shrinkage”, in which the largest coefficients are ”shrunk” towards more realistic
values. In this paper we evaluate two such shrinkage techniques and compare it to
the sample covariance matrix as well as a one-factor model suggested by Sharpe
(1963). Indeed we find shrinking the covariance matrix provides significant ben-
efits. We show that for well diversified portfolios of, for example, 100 stocks for
which we seek to minimize variance and at the same time maximize the Sharpe
ratio, that such portfolios are well suited to optimization via either shrinking the
covariance matrix or applying no-shorting with upper-limit constraints.

1
1 Introduction

2 Problem and Setting

3 Methodology

4 Empirical Results

5 Conclusion

References

[1] John Y Campbell, Martin Lettau, Burton G Malkiel, and Yexiao Xu. Have individual
stocks become more volatile? an empirical exploration of idiosyncratic risk. The Journal
of Finance, 56(1):1–43, 2001.
[2] Ravi Jagannathan and Tongshu Ma. Risk reduction in large portfolios: Why imposing
the wrong constraints helps. The Journal of Finance, 58(4):1651–1684, 2003.
[3] J David Jobson and Bob Korkie. Estimation for markowitz efficient portfolios. Journal
of the American Statistical Association, 75(371):544–554, 1980.
[4] Olivier Ledoit and Michael Wolf. Honey, i shrunk the sample covariance matrix. UPF
Economics and Business Working Paper, (691), 2003.
[5] Harry Markowitz. Portfolio selection*. The journal of finance, 7(1):77–91, 1952.
[6] William F Sharpe. A simplified model for portfolio analysis. Management science,
9(2):277–293, 1963.

2
A Tables

A.1 Minimum Variance Portfolio Results

Table 1: Monthly Return Data for Minimum Variance Portfolios with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.894% 4.383% 0.12574
Sample Covariance Matrix, Unconstrained 0.538% 8.022% 0.02433
Sample Covariance Matrix, Non-Zero Weights 0.926% 3.850% 0.15151
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.940% 3.766% 0.15852
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.950% 4.375% 0.13882
One-Factor Model, Unconstrained 0.980% 4.874% 0.13060
One-Factor Model, Non-Zero Weights 0.980% 4.780% 0.13327
One-Factor Model, Non-Zero Weights, 10% Limit 0.974% 4.752% 0.13283
One-Factor Model, Non-Zero Weights, 5% Limit 0.988% 4.654% 0.13857
Ledoit and Wolf (2003) Estimator, Unconstrained 0.914% 4.046% 0.14120
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.913% 3.819% 0.14912
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.916% 3.766% 0.15217
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.931% 3.811% 0.15416

Table 2: Annual Return Data for Minimum Variance Portfolios with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.524% 17.927% 0.40643
Sample Covariance Matrix, Unconstrained 6.326% 28.153% 0.07417
Sample Covariance Matrix, Non-Zero Weights 11.816% 16.121% 0.47008
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 12.039% 15.868% 0.49160
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 12.268% 17.955% 0.44723
One-Factor Model, Unconstrained 12.719% 20.297% 0.41789
One-Factor Model, Non-Zero Weights 12.851% 20.515% 0.41986
One-Factor Model, Non-Zero Weights, 10% Limit 12.746% 20.270% 0.41975
One-Factor Model, Non-Zero Weights, 5% Limit 12.845% 19.476% 0.44194
Ledoit and Wolf (2003) Estimator, Unconstrained 11.653% 16.805% 0.44126
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 11.642% 15.671% 0.47247
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 11.747% 15.938% 0.47122
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 11.921% 15.871% 0.48409

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 Table 3: Monthly Return Data for Minimum Variance Portfolios with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.903% 4.382% 0.12767
Sample Covariance Matrix, Unconstrained 0.713% 4.663% 0.07937
Sample Covariance Matrix, Non-Zero Weights 0.917% 3.516% 0.16313
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.901% 3.481% 0.16025
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.884% 3.549% 0.15253
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 0.911% 3.772% 0.15045
One-Factor Model, Unconstrained 0.950% 5.203% 0.11659
One-Factor Model, Non-Zero Weights 0.954% 4.866% 0.12548
One-Factor Model, Non-Zero Weights, 10% Limit 0.954% 4.863% 0.12563
One-Factor Model, Non-Zero Weights, 5% Limit 0.955% 4.819% 0.12696
One-Factor Model, Non-Zero Weights, 2% Limit 0.942% 4.646% 0.12899
Ledoit and Wolf (2003) Estimator, Unconstrained 0.882% 3.719% 0.14484
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.928% 3.508% 0.16676
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.937% 3.498% 0.16978
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.919% 3.539% 0.16135
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 0.939% 3.789% 0.15730

Table 4: Annual Return Data for Minimum Variance Portfolios with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.638% 17.852% 0.41456
Sample Covariance Matrix, Unconstrained 9.203% 19.606% 0.25324
Sample Covariance Matrix, Non-Zero Weights 11.716% 14.562% 0.51355
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 11.517% 14.377% 0.50633
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 11.402% 15.272% 0.46911
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 11.670% 15.529% 0.47861
One-Factor Model, Unconstrained 12.422% 21.883% 0.37401
One-Factor Model, Non-Zero Weights 12.602% 21.213% 0.39431
One-Factor Model, Non-Zero Weights, 10% Limit 12.603% 21.191% 0.39477
One-Factor Model, Non-Zero Weights, 5% Limit 12.602% 21.212% 0.39433
One-Factor Model, Non-Zero Weights, 2% Limit 12.328% 19.542% 0.41398
Ledoit and Wolf (2003) Estimator, Unconstrained 11.239% 15.502% 0.45164
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 11.932% 15.002% 0.51290
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 12.031% 14.768% 0.52722
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 11.774% 15.150% 0.49741
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 12.020% 15.490% 0.50239

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A.2 Maximum Sharpe Ratio Portfolio Results

Table 5: Monthly Return Data for Maximum Sharpe Ratio Portfolios with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.894% 4.383% 0.12574
Sample Covariance Matrix, Weights less than 1 2.204% 15.323% 0.12144
Sample Covariance Matrix, Non-Zero Weights 1.203% 5.002% 0.17192
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 1.142% 4.443% 0.17993
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 1.080% 4.284% 0.17197
One-Factor Model, Weights less than 1 1.671% 9.532% 0.13932
One-Factor Model, Non-Zero Weights 1.174% 6.542% 0.12703
One-Factor Model, Non-Zero Weights, 10% Limit 1.052% 5.673% 0.12499
One-Factor Model, Non-Zero Weights, 5% Limit 1.027% 4.989% 0.13715
Ledoit and Wolf (2003) Estimator, Weights less than 1 2.437% 14.730% 0.14218
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 1.192% 5.254% 0.16153
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 1.141% 4.552% 0.17519
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 1.064% 4.405% 0.16539

Table 6: Annual Return Data for Maximum Sharpe Ratio Portfolios with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolios 11.524% 17.927% 0.40643
Sample Covariance Matrix, Weights less than 1 26.094% 66.420% 0.32907
Sample Covariance Matrix, Non-Zero Weights 15.164% 17.368% 0.62908
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 14.688% 17.938% 0.58256
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 13.828% 17.119% 0.56203
One-Factor Model, Weights less than 1 23.764% 45.598% 0.42822
One-Factor Model, Non-Zero Weights 16.231% 29.278% 0.40964
One-Factor Model, Non-Zero Weights, 10% Limit 14.044% 24.522% 0.39990
One-Factor Model, Non-Zero Weights, 5% Limit 13.431% 21.083% 0.43607
Ledoit and Wolf (2003) Estimator, Weights less than 1 28.258% 49.665% 0.48364
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 15.305% 19.853% 0.55747
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 14.799% 18.741% 0.56353
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 13.690% 18.012% 0.52476

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 Table 7: Monthly Return Data for Maximum Sharpe Ratio Portfolios with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolios 0.903% 4.382% 0.12767
Sample Covariance Matrix, Weights less than 1 0.618% 10.122% 0.02713
Sample Covariance Matrix, Non-Zero Weights 0.959% 4.735% 0.13011
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.980% 4.181% 0.15225
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.997% 4.171% 0.15685
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 0.977% 4.188% 0.15141
One-Factor Model, Weights less than 1 1.583% 9.224% 0.13447
One-Factor Model, Non-Zero Weights 1.008% 6.684% 0.09954
One-Factor Model, Non-Zero Weights, 10% Limit 1.053% 6.365% 0.11154
One-Factor Model, Non-Zero Weights, 5% Limit 1.005% 5.670% 0.11668
One-Factor Model, Non-Zero Weights, 2% Limit 0.968% 4.747% 0.13155
Ledoit and Wolf (2003) Estimator, Weights less than 1 1.695% 18.136% 0.07454
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 1.105% 5.034% 0.15143
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 1.133% 4.390% 0.17996
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 1.010% 4.329% 0.15404
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 0.988% 4.286% 0.15041

Table 8: Annual Return Data for Maximum Sharpe Ratio Portfolios with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.638% 17.852% 0.41456
Sample Covariance Matrix, Weights less than 1 9.759% 43.593% 0.12665
Sample Covariance Matrix, Non-Zero Weights 12.661% 20.438% 0.41215
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 12.746% 17.573% 0.48418
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 12.957% 17.797% 0.48994
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 12.715% 18.012% 0.47061
One-Factor Model, Weights less than 1 21.928% 41.519% 0.42607
One-Factor Model, Non-Zero Weights 14.293% 31.381% 0.32043
One-Factor Model, Non-Zero Weights, 10% Limit 14.710% 29.817% 0.35122
One-Factor Model, Non-Zero Weights, 5% Limit 13.763% 26.251% 0.36287
One-Factor Model, Non-Zero Weights, 2% Limit 12.652% 19.975% 0.42121
Ledoit and Wolf (2003) Estimator, Weights less than 1 17.876% 63.047% 0.21632
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 14.556% 21.092% 0.48921
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 14.851% 18.899% 0.56158
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 13.163% 18.462% 0.48348
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 12.879% 18.500% 0.46710

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A.3 Minimum Variance Portfolios - Value Weighted Return + 0%

Table 9: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 0% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.894% 4.383% 0.12574
Sample Covariance Matrix, Unconstrained 0.858% 7.378% 0.06982
Sample Covariance Matrix, Non-Zero Weights 0.932% 3.780% 0.15585
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.957% 3.785% 0.16216
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.974% 3.799% 0.16600
One-Factor Model, Unconstrained 0.969% 4.870% 0.12843
One-Factor Model, Non-Zero Weights 0.973% 4.676% 0.13472
One-Factor Model, Non-Zero Weights, 10% Limit 0.971% 4.656% 0.13493
One-Factor Model, Non-Zero Weights, 5% Limit 0.975% 4.588% 0.13770
Ledoit and Wolf (2003) Estimator, Unconstrained 0.984% 3.991% 0.16050
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.936% 3.774% 0.15700
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.923% 3.760% 0.15418
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.970% 3.809% 0.16548

Table 10: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 0% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.524% 17.927% 0.40643
Sample Covariance Matrix, Unconstrained 9.766% 23.952% 0.23079
Sample Covariance Matrix, Non-Zero Weights 11.837% 15.475% 0.49106
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 12.222% 15.707% 0.50832
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 12.498% 15.941% 0.51818
One-Factor Model, Unconstrained 12.450% 19.505% 0.42104
One-Factor Model, Non-Zero Weights 12.608% 19.301% 0.43366
One-Factor Model, Non-Zero Weights, 10% Limit 12.573% 19.167% 0.43490
One-Factor Model, Non-Zero Weights, 5% Limit 12.562% 18.576% 0.44812
Ledoit and Wolf (2003) Estimator, Unconstrained 12.514% 16.446% 0.50326
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 11.921% 15.469% 0.49670
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 11.800% 15.755% 0.48001
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 12.390% 15.535% 0.52479

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Table 11: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 0% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.903% 4.382% 0.12767
Sample Covariance Matrix, Unconstrained 0.674% 4.744% 0.06981
Sample Covariance Matrix, Non-Zero Weights 0.874% 3.532% 0.15028
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.878% 3.493% 0.15310
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.886% 3.557% 0.15268
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 0.943% 3.779% 0.15874
One-Factor Model, Unconstrained 0.942% 5.181% 0.11568
One-Factor Model, Non-Zero Weights 0.918% 4.751% 0.12093
One-Factor Model, Non-Zero Weights, 10% Limit 0.919% 4.744% 0.12143
One-Factor Model, Non-Zero Weights, 5% Limit 0.926% 4.691% 0.12436
One-Factor Model, Non-Zero Weights, 2% Limit 0.948% 4.582% 0.13195
Ledoit and Wolf (2003) Estimator, Unconstrained 0.904% 3.662% 0.15328
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.932% 3.522% 0.16726
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.924% 3.524% 0.16476
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.920% 3.563% 0.16202
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 0.956% 3.774% 0.16251

Table 12: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 0% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Return 11.638% 17.852% 0.41456
Sample Covariance Matrix, Unconstrained 8.969% 21.016% 0.22515
Sample Covariance Matrix, Non-Zero Weights 11.108% 14.408% 0.47683
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 11.195% 14.431% 0.48214
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 11.390% 15.096% 0.47376
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 12.163% 16.056% 0.49356
One-Factor Model, Unconstrained 12.303% 21.563% 0.37403
One-Factor Model, Non-Zero Weights 12.043% 20.246% 0.38554
One-Factor Model, Non-Zero Weights, 10% Limit 12.071% 20.272% 0.38641
One-Factor Model, Non-Zero Weights, 5% Limit 12.150% 20.017% 0.39528
One-Factor Model, Non-Zero Weights, 2% Limit 12.354% 19.175% 0.42327
Ledoit and Wolf (2003) Estimator, Unconstrained 11.540% 15.440% 0.47295
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 11.934% 14.798% 0.52007
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 11.840% 14.869% 0.51129
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 11.837% 15.195% 0.50012
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 12.260% 15.519% 0.51692

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A.4 Minimum Variance Portfolios - Value Weighted Return + 2%

Table 13: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 2% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.894% 4.383% 0.12574
Sample Covariance Matrix, Unconstrained 0.899% 7.431% 0.07486
Sample Covariance Matrix, Non-Zero Weights 0.941% 3.798% 0.15742
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.975% 3.805% 0.16617
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.996% 3.833% 0.17036
One-Factor Model, Unconstrained 0.983% 4.899% 0.13069
One-Factor Model, Non-Zero Weights 0.986% 4.713% 0.13648
One-Factor Model, Non-Zero Weights, 10% Limit 0.986% 4.692% 0.13697
One-Factor Model, Non-Zero Weights, 5% Limit 0.988% 4.624% 0.13943
Ledoit and Wolf (2003) Estimator, Unconstrained 1.000% 4.009% 0.16381
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.947% 3.788% 0.15943
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.930% 3.780% 0.15539
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.991% 3.845% 0.16850

Table 14: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 2% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.524% 17.927% 0.40643
Sample Covariance Matrix, Unconstrained 10.267% 24.094% 0.25023
Sample Covariance Matrix, Non-Zero Weights 11.958% 15.564% 0.49602
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 12.477% 15.889% 0.51857
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 12.816% 16.223% 0.52877
One-Factor Model, Unconstrained 12.663% 19.756% 0.42646
One-Factor Model, Non-Zero Weights 12.787% 19.473% 0.43904
One-Factor Model, Non-Zero Weights, 10% Limit 12.770% 19.347% 0.44099
One-Factor Model, Non-Zero Weights, 5% Limit 12.741% 18.771% 0.45298
Ledoit and Wolf (2003) Estimator, Unconstrained 12.727% 16.547% 0.51302
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 12.087% 15.631% 0.50218
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 11.923% 15.992% 0.48054
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 12.690% 15.866% 0.53271

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Table 15: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 2% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.903% 4.382% 0.12767
Sample Covariance Matrix, Unconstrained 0.661% 4.776% 0.06650
Sample Covariance Matrix, Non-Zero Weights 0.881% 3.548% 0.15167
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.877% 3.508% 0.15222
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.896% 3.567% 0.15487
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 0.956% 3.806% 0.16109
One-Factor Model, Unconstrained 0.950% 5.199% 0.11682
One-Factor Model, Non-Zero Weights 0.928% 4.774% 0.12225
One-Factor Model, Non-Zero Weights, 10% Limit 0.928% 4.769% 0.12264
One-Factor Model, Non-Zero Weights, 5% Limit 0.936% 4.720% 0.12558
One-Factor Model, Non-Zero Weights, 2% Limit 0.946% 4.598% 0.13144
Ledoit and Wolf (2003) Estimator, Unconstrained 0.909% 3.678% 0.15396
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 0.950% 3.546% 0.17113
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 0.930% 3.547% 0.16541
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 0.936% 3.574% 0.16599
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 0.970% 3.796% 0.16516

Table 16: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 2% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.638% 17.852% 0.41456
Sample Covariance Matrix, Unconstrained 8.826% 21.264% 0.21576
Sample Covariance Matrix, Non-Zero Weights 11.215% 14.562% 0.47912
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 11.191% 14.543% 0.47815
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 11.519% 15.196% 0.47920
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 12.353% 16.245% 0.49954
One-Factor Model, Unconstrained 12.432% 21.808% 0.37576
One-Factor Model, Non-Zero Weights 12.210% 20.508% 0.38872
One-Factor Model, Non-Zero Weights, 10% Limit 12.206% 20.484% 0.38900
One-Factor Model, Non-Zero Weights, 5% Limit 12.301% 20.283% 0.39752
One-Factor Model, Non-Zero Weights, 2% Limit 12.332% 19.255% 0.42037
Ledoit and Wolf (2003) Estimator, Unconstrained 11.609% 15.543% 0.47424
Ledoit and Wolf (2003) Estimator, Non-Zero Weights 12.179% 15.008% 0.52915
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 10% Limit 11.950% 15.219% 0.50675
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 5% Limit 12.064% 15.386% 0.50864
Ledoit and Wolf (2003) Estimator, Non-Zero Weights, 2% Limit 12.467% 15.831% 0.51986

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A.5 Minimum Variance Portfolios - Value Weighted Return + 5%

Table 17: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 5% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.894% 4.383% 0.12574
Sample Covariance Matrix, Unconstrained 0.967% 7.531% 0.08286
Sample Covariance Matrix, Non-Zero Weights 0.972% 3.847% 0.16343
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 1.008% 3.860% 0.17219
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 1.035% 3.921% 0.17643
One-Factor Model, Unconstrained 1.005% 4.953% 0.13367
One-Factor Model, Non-Zero Weights 1.006% 4.791% 0.13848
One-Factor Model, Non-Zero Weights, 10% Limit 1.002% 4.767% 0.13833
One-Factor Model, Non-Zero Weights, 5% Limit 1.005% 4.674% 0.14155
Ledoit and Wolfe (2003) Estimator, Unconstrained 1.024% 4.047% 0.16815
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights 0.972% 3.836% 0.16391
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 10% Limit 0.963% 3.841% 0.16148
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 5% Limit 1.023% 3.924% 0.17335

Table 18: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 5% with 50 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.524% 17.927% 0.40643
Sample Covariance Matrix, Unconstrained 11.116% 24.505% 0.28068
Sample Covariance Matrix, Non-Zero Weights 12.381% 15.802% 0.51532
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 12.903% 16.007% 0.54134
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 13.336% 16.573% 0.54899
One-Factor Model, Unconstrained 12.982% 20.198% 0.43293
One-Factor Model, Non-Zero Weights 13.075% 19.897% 0.44413
One-Factor Model, Non-Zero Weights, 10% Limit 12.290% 19.786% 0.44464
One-Factor Model, Non-Zero Weights, 5% Limit 12.993% 19.166% 0.45680
Ledoit and Wolfe (2003) Estimator, Unconstrained 13.038% 16.735% 0.52584
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights 12.442% 15.946% 0.51454
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 10% Limit 12.367% 16.201% 0.50178
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 5% Limit 13.109% 16.095% 0.55118

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Table 19: Monthly Return Data for Minimum Variance Portfolio - Value Weighted Return + 5% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 0.903% 4.382% 0.12767
Sample Covariance Matrix, Unconstrained 0.640% 4.833% 0.06154
Sample Covariance Matrix, Non-Zero Weights 0.893% 3.588% 0.15331
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 0.871% 3.537% 0.14921
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 0.905% 3.592% 0.15644
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 0.968% 3.891% 0.16065
One-Factor Model, Unconstrained 0.962% 5.233% 0.11834
One-Factor Model, Non-Zero Weights 0.933% 4.834% 0.12212
One-Factor Model, Non-Zero Weights, 10% Limit 0.933% 4.828% 0.12222
One-Factor Model, Non-Zero Weights, 5% Limit 0.941% 4.775% 0.12518
One-Factor Model, Non-Zero Weights, 2% Limit 0.942% 4.606% 0.13010
Ledoit and Wolfe (2003) Estimator, Unconstrained 0.917% 3.708% 0.15471
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights 0.973% 3.587% 0.17572
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 10% Limit 0.949% 3.584% 0.16913
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 5% Limit 0.961% 3.591% 0.17211
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 2% Limit 0.980% 3.883% 0.16393

Table 20: Annual Return Data for Minimum Variance Portfolio - Value Weighted Return + 5% with 100 stocks

µr σr Sharpe Ratio
Value Weighted Portfolio 11.638% 17.852% 0.41456
Sample Covariance Matrix, Unconstrained 8.610% 21.641% 0.20202
Sample Covariance Matrix, Non-Zero Weights 11.386% 14.812% 0.48262
Sample Covariance Matrix, Non-Zero Weights, 10% Limit 11.109% 14.570% 0.47160
Sample Covariance Matrix, Non-Zero Weights, 5% Limit 11.642% 15.269% 0.48490
Sample Covariance Matrix, Non-Zero Weights, 2% Limit 12.538% 16.758% 0.49533
One-Factor Model, Unconstrained 12.625% 22.204% 0.37776
One-Factor Model, Non-Zero Weights 12.313% 20.909% 0.38621
One-Factor Model, Non-Zero Weights, 10% Limit 12.310% 20.894% 0.38634
One-Factor Model, Non-Zero Weights, 5% Limit 12.396% 20.651% 0.39506
One-Factor Model, Non-Zero Weights, 2% Limit 12.292% 19.349% 0.41626
Ledoit and Wolfe (2003) Estimator, Unconstrained 11.711% 15.714% 0.47558
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights 12.509% 15.303% 0.54051
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 10% Limit 12.230% 15.502% 0.51561
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 5% Limit 12.425% 15.722% 0.52073
Ledoit and Wolfe (2003) Estimator, Non-Zero Weights, 2% Limit 12.628% 16.353% 0.51308

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