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dc.contributor.authorErnst, Philip A.
Thompson, James R.
Miao, Yinsen
dc.date.accessioned 2020-09-09T01:27:28Z
dc.date.available 2020-09-09T01:27:28Z
dc.date.issued 2017
dc.identifier.citation Ernst, Philip A., Thompson, James R. and Miao, Yinsen. "Tukey's transformational ladder for portfolio management." Financial Markets and Portfolio Management, 31, no. 3 (2017) Springer: 317-355. https://doi.org/10.1007/s11408-017-0292-1.
dc.identifier.urihttps://hdl.handle.net/1911/109322
dc.description.abstract Over the past half-century, the empirical finance community has produced vast literature on the advantages of the equally weighted Standard and Poor (S&P 500) portfolio as well as the often overlooked disadvantages of the market capitalization weighted S&P 500’s portfolio (see Bloomfield et al. in J Financ Econ 5:201–218, 1977; DeMiguel et al. in Rev Financ Stud 22(5):1915–1953, 2009; Jacobs et al. in J Financ Mark 19:62–85, 2014; Treynor in Financ Anal J 61(5):65–69, 2005). However, portfolio allocation based on Tukey’s transformational ladder has, rather surprisingly, remained absent from the literature. In this work, we consider the S&P 500 portfolio over the 1958–2015 time horizon weighted by Tukey’s transformational ladder (Tukey in Exploratory data analysis, Addison-Wesley, Boston, 1977): 1/x2,1/x,1/x−−√,log(x),x−−√,x,andx2, where x is defined as the market capitalization weighted S&P 500 portfolio. Accounting for dividends and transaction fees, we find that the 1/x2 weighting strategy produces cumulative returns that significantly dominate all other portfolio returns, achieving a compound annual growth rate of 18% over the 1958–2015 horizon. Our story is furthered by a startling phenomenon: both the cumulative and annual returns of the 1/x2 weighting strategy are superior to those of the 1 / x weighting strategy, which are in turn superior to those of the 1/x−−√ weighted portfolio, and so forth, ending with the x2 transformation, whose cumulative returns are the lowest of the seven transformations of Tukey’s transformational ladder. The order of cumulative returns precisely follows that of Tukey’s transformational ladder. To the best of our knowledge, we are the first to discover this phenomenon.
dc.language.iso eng
dc.publisher Springer
dc.rights This is an author's peer-reviewed final manuscript, as accepted by the publisher. The published article is copyrighted by Springer.
dc.title Tukey's transformational ladder for portfolio management
dc.type Journal article
dc.citation.journalTitle Financial Markets and Portfolio Management
dc.citation.volumeNumber 31
dc.citation.issueNumber 3
dc.type.dcmi Text
dc.identifier.doihttps://doi.org/10.1007/s11408-017-0292-1
dc.type.publication pre-print
dc.citation.firstpage 317
dc.citation.lastpage 355


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