Advances in Investment Analysis and Portfolio Management, Volume 9

strategies that use linear asset pricing models tend to underperform passive

combinations of the risk-free asset and the domestic market index. There is an

improvement in the out of sample performance using the FS measure. The

underperformance is substantial for the strategies which use the FF and EGB

models. These latter two strategies also have negative Sharpe performance.

When investors face binding investment constraints as in Table 4, the Sharpe

performance of all five asset allocation strategies increases. The strategies now

have considerably lower volatility. The strategy that uses the characteristics

model has the highest Sharpe performance across the five strategies. However

it still underperforms the market Sharpe measure. This strategy also generates

Table 4. Performance of Asset Allocation Strategies: Restricted.

Panel A

Mean Std

Deviation

Sharpe Minimum Maximum

Char 0.335 3.26 0.103 –25.01 14.73

CAPM 0.143 2.67 0.054 –28.34 7.58

FF 0.204 2.82 0.072 –30.13 6.43

EGB 0.194 2.85 0.068 –30.12 6.70

APT 0.241 2.82 0.085 –28.16 6.88

Panel B

Char CAPM FF EGB APT

Jensen 0.005

(0.27)

–0.111

(–0.69)

–0.066

(–0.39)

–0.082

(–0.49)

–0.033

(–0.22)

FS 0.204

(1.69)

0.097

(1.37)

0.142

(1.96)

0.123

(1.67)

0.153

(1.69)

* Significant at 5%.

The out of sample performance of monthly asset allocation strategies is evaluated between

February 1981 and April 2000. Expected returns are estimated from a characteristics model of

stock returns (Char) and unconditional versions of linear asset pricing models of the CAPM, Fama

and French (1993) (FF), Elton, Gruber and Blake (1996) (EGB) and APT models. Panel A includes

summary statistics of performance of the five strategies that also includes the Sharpe (1966)

measure. Panel B reports the performance measures of Jensen (1968) measure and the conditional

measure of Ferson and Schadt (1996) (FS). The t-statistics (in parentheses) are corrected for

heteroskedasticity using White (1980). The asset allocation strategies are estimated with no short

selling allowed in the risky assets and an upper bound constraint of 20% in each risky asset. All

performance numbers are monthly %.

264 JONATHAN FLETCHER