Effects of Uncertain and Nonstationary Parameters upon Capital Market Equilibrium Conditions

Abstract

Formal models for portfolio analysis, such as Markowitz [13], are frequently based upon mean-variance analyses and involve the estimation of a mean vector and a variance-covariance matrix describing expected returns and variability of returns for all securities under consideration. These parameter estimates play a major role in the selection of a single, optimal portfolio. Kalymon [9] and Barry [1] have considered the effects of parameter uncertainty upon individual investors' inferences and decisions in the context of portfolio selection, and Barry and Winkler [2] have similarly considered the impact of nonstationary means upon portfolio selection decisions by individual investors.