Portfolio Returns and the Random Walk Theory

Cheng, Pao Lun; Deets, M. King

doi:10.1111/j.1540-6261.1971.tb00585.x

Cited by 31 publications

(18 citation statements)

References 9 publications

(20 reference statements)

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“…The upward skew of this lognormal distribution gives E e σW t P u ] clearly tends to zero as the time horizon increases, and our simulations confirm that the average terminal value is higher for unrebalanced portfolios. Cheng and Deets (1971) demonstrate a similar result in discrete time, and we noted its antecedents in continuous time in the Introduction.…”

supporting

confidence: 71%

“…In the theoretical literature, Cheng and Deets (1971) compare the performance of B&H and rebalancing strategies, assuming that risky asset prices follow random walks and are IID except for their different mean returns μ i . The B&H strategy and the rebalancing strategy give the same expected terminal wealth when the mean returns of all risky assets are equal.…”

Section: Literature Reviewmentioning

confidence: 99%

“…For simplicity, we assume all asset returns are IID and not autocorrelated. 6 Without this assumption, assets with larger expected returns are likely over time to comprise a larger proportion of an unrebalanced portfolio, raising E [AM] of the portfolio as a whole, as shown by Cheng and Deets (1971). By removing this effect, our assumption of IID asset returns not only simplifies the analysis but it is also generous to rebalanced portfolios.…”

Section: Rebalancing Multiple Asset Portfoliosmentioning

confidence: 99%

See 2 more Smart Citations

What Does Rebalancing Really Achieve?

Cuthbertson¹,

Hayley²,

Motson³

et al. 2016

Int. J. Fin. Econ.

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supporting

confidence: 71%

Section: Literature Reviewmentioning

confidence: 99%

Section: Rebalancing Multiple Asset Portfoliosmentioning

confidence: 99%

See 1 more Smart Citation

What Does Rebalancing Really Achieve?

Cuthbertson¹,

Hayley²,

Motson³

et al. 2016

Int. J. Fin. Econ.

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“…Anyone wishing to replicate this study will find the necessary information in these two articles. 9Cheng and Deets [5] have argued that the resulting survival bias is probably not significant since other studies that were not subject to this bias obtained results similar to their results. In a recent study, Sunder [17] tests his results for sensitivity to this bias.…”

supporting

confidence: 72%

Short Sales and Mechanical Trading Rules*

Nawrocki¹

1981

The Financial Review

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The purpose of this paper is to explore the viability of short sales in a mechanical trading rule before and after the implementation of government regulation of security markets, thereby providing a test of the effectiveness of government regulations.The government regulations were implemented through the Securities Act of 1933 and the Securities Exchange Act of 1934.' These acts sought to provide less volatile and more efficient security markets. In addition to the public disclosure of accounting information, these acts provided additional restrictions on short sales. It was felt at the time that short sales had been used in market manipulation schemes that were detrimental to the efficiency of the markets. At first, the uptick rule was implemented along with higher margin requirements.2 During a later period (1937)(1938)(1939)(1940)(1941)(1942)(1943)(1944)(1945), short sales were subjected to a higher margin requirement. The effect of these changes on short sales by the public was dramatic. In the 1920's, the majority of all short sales on the New York Stock Exchange were by non-members. By 1964, this proportion had declined to 23%. Currently, only 15% of all short sales are by nonmembers.This decline in use could result from two major scenarios. First, investors when faced with these restrictions could have instituted short positions through alternative methods such as the use of options. With the growth of the option markets during the 1970's, these alternative short positions have become easier to accomplish and may, in fact, explain the decrease in short sales by the public since 1964.A second scenario is that short positions are not as profitable with government regulations as they were in the unregulated market environment prior to 1935. A drop in the profitability of short positions after 1935 would indicate that government regulations improved the efficiency of the stock market. This second view is controversial since Benston [2] [3] has argued that government regulation has not had any favorable effect on security markets. This paper will present an empirical test of this second scenario by using a mechanical trading rule that employs short sales. Empirical evidence will be presented that shows that the profitability of a trading strategy utilizing short sales declines dramatically after 1935.

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“…This theory considers investors to be risk adverse: they are willing to accept more risk (volatility) for higher payoffs and will accept lower returns for less volatile investment (for further discussions see, inter alia, Nielsen, 1987;Cheng and Deets, 1971;Pogue, 1970). Markowitz (1991) explains that, to maximise the expected value of a portfolio, one need only invest in one security -the security with maximum expected returns.…”

Section: Theoretical Framework: Portfolio Theorymentioning

confidence: 99%

On the Relationship between Stock Prices and Exchange Rates for India

Narayan

2009

Rev. Pac. Basin Finan. Mark. Pol.

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In this paper, we apply several variants of the EGARCH model to examine the role of depreciation of the Indian rupee on India's stock market returns using daily data. Our findings suggest that volatility persistence has been high; depreciation of the rupee has increased volatility; and asymmetric volatility confirms that negative shocks generate more volatility than positive shocks. We also find that an appreciation of the Indian rupee over the 2002 to 2006 has generated more returns and less volatility.

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Portfolio Returns and the Random Walk Theory

Cited by 31 publications

References 9 publications

What Does Rebalancing Really Achieve?

What Does Rebalancing Really Achieve?

Short Sales and Mechanical Trading Rules*

On the Relationship between Stock Prices and Exchange Rates for India

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