strategy that uses the characteristics model. The strategy that uses the FF model
has the highest Sharpe performance across the four strategies in panel A of
Table 5. This is more than three times larger than the corresponding Sharpe
performance of the FTA market index. This stands in sharp contrast to the
Table 5. Performance of Asset Allocation Strategies: Conditional Models.
Panel A
Mean Std Deviation Sharpe Minimum Maximum
CAPM 1.132 3.27 0.346 –6.89 24.56
FF 2.938 5.94 0.495 –9.49 28.16
EGB 2.791 6.39 0.437 –13.56 28.86
APT 2.965 9.85 0.301 –29.82 92.09
CAPM FF EGB APT
Jensen 1.155
(4.15)*
2.957
(7.15)*
2.840
(6.28)*
3.132
(4.62)*
FS 0.831
(3.34)*
2.798
(5.89)*
2.664
(5.32)*
2.695
(3.99)*
Panel B
Mean Std Deviation Sharpe Minimum Maximum
CAPM 0.845 2.27 0.372 –6.89 16.41
FF 1.052 2.70 0.389 –6.13 15.83
EGB 1.063 2.73 0.389 –7.28 16.25
APT 0.920 2.51 0.366 –5.61 12.01
CAPM FF EGB APT
Jensen 0.687
(5.34)*
0.852
(5.53)*
0.864
(5.48)*
0.743
(5.19)*
FS 0.505
(4.31)*
0.673
(5.26)*
0.675
(5.55)*
0.578
(4.36)*
* 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 the conditional versions of
linear asset pricing models of the CAPM, Fama and French (1993) (FF), Elton, Gruber and Blake
(1996) (EGB) and APT models. Each panel includes summary statistics of performance and two
performance measures with t-statistics in parentheses. The two performance measures are the
Jensen (1968) measure and the conditional measure of Ferson and Schadt (1996) (FS). The t-
statistics are corrected for heteroskedasticity using White (1980). Panel A refers to the case where
there are no investment constraints and panel B refers to the case where there are short selling and
20% upper bound constraints in the risky assets. All performance numbers are monthly %.
266 JONATHAN FLETCHER

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