After meeting with XTR, Swan, Gruber, and Morrison discuss some of the criticisms of MVO portfolios.
- Swan: MVO portfolios are diversified with respect to risk factors such as value, size, and quality.
- Gruber: MVO portfolios are more sensitive to measurement errors in the expected return than to measurement errors in correlation and risk.
- Morrison: Some of the issues with MVO can be corrected by using reverse optimization to solve for risk parameters based on inputs for expected return and correlation.
In the discussion of the criticisms of MVO portfolios, the most accurate statement is made by:
A.Swan.
B.Gruber.
C.Morrison.
Solution
A.Incorrect. MVO portfolios are based on market risk only.
B.Correct. Gruber is correct. MVO portfolios are more sensitive to measurement errors in the expected return than to measurement errors in correlation and risk.
C.Incorrect. Reverse optimization uses inputs for risk and correlation (or covariance) to solve for expected return.
