TY  - JOUR
AU  - Chan,Louis K.C.
AU  - Karceski,Jason
AU  - Lakonishok,Josef
TI  - On Portfolio Optimization:  Forecasting Covariances and Choosing the Risk Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7039
PY  - 1999
Y2  - March 1999
UR  - http://www.nber.org/papers/w7039
L1  - http://www.nber.org/papers/w7039.pdf
N1  - Author contact info:
Louis Chan
Department of Finance
University of Illinois
113 Commerce West, MC 706
1206 S. Sixth
Champaign, IL 61820
Tel: 217/333-6391
E-Mail: l-chan2@uiuc.edu

Jason Karceski
University of Florida
P.O. Box 117168
Gainesville, Florida 32653
Tel: 352/846-1059
Fax: 352/392-0301
E-Mail: jason.karceski@cba.ufl.edu

Josef Lakonishok
University of Illinois, Department of Finance
College of Commerce & Business Administration
1206 S. Sixth Street
Champaign, IL 61820
Tel: 217/333-7185
Fax: 217/244-1151
E-Mail: jlakonishok@yahoo.com
AB  - We evaluate the performance of different models for the covariance structure of stock returns, focusing on their use for optimal portfolio selection.  Comparisons are based on forecasts of future covariances as well as the out-of-sample volatility of optimized portfolios from each model.  A few factors capture the general covariance structure but adding more factors does not improve forecast power.  Portfolio optimization helps for risk control,  but the different covariance models yield similar results.  Using a tracking error volatility criterion, larger differences appear, with particularly favorable results for a heuristic approach based on matching the benchmark's attributes.
ER  -