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Article

The Effect of value Estimation Errors On Portfolio Growth Rates

Robert A Ferguson, Dean Leistikow, Joel Rentzler and Susana Yu
The Journal of Investing Summer 2009, 18 (2) 69-75; DOI: https://doi.org/10.3905/JOI.2009.18.2.069
Robert A Ferguson
is a senior investment officer at INTECH in West Palm Beach, FL.
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  • For correspondence: rferguson@intechjanus.com
Dean Leistikow
is a professor of finance at Fordham University in New York, NY.
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  • For correspondence: leistikow@fordham.edu
Joel Rentzler
is a professor of finance at Baruch University in New York, NY.
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  • For correspondence: joel.rentzler@baruch.cuny.edu
Susana Yu
is an associate professor of finance at Montclair State University in Upper Montclair, NJ.
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  • For correspondence: yus@mail.montclair.edu
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Abstract

This article analyzes the impact of value estimation errors on portfolios’ growth rates and relative growth rates for several portfolio weighting methods. In contrast to previous articles, this one addresses the effect of estimation errors on portfolio growth rates due to increased return volatility. The portfolio weighting methods examined include capitalization weights, estimation error independent weights, Fundamental weights, and Diversity weights. The article provides theoretical support, in the context of estimation error, for the empirical findings that many non-capitalization weighted portfolios’ returns beat the market’s capitalization-weighted portfolio return over time. It also provides a theory for the size effect.

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The Journal of Investing
Vol. 18, Issue 2
Summer 2009
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The Effect of value Estimation Errors On Portfolio Growth Rates
Robert A Ferguson, Dean Leistikow, Joel Rentzler, Susana Yu
The Journal of Investing May 2009, 18 (2) 69-75; DOI: 10.3905/JOI.2009.18.2.069

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The Effect of value Estimation Errors On Portfolio Growth Rates
Robert A Ferguson, Dean Leistikow, Joel Rentzler, Susana Yu
The Journal of Investing May 2009, 18 (2) 69-75; DOI: 10.3905/JOI.2009.18.2.069
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  • Article
    • Abstract
    • THE EFFECT OF MISPRICING CORRECTIONS ON STOCKS’ AND PORTFOLIOS’ RETURNS
    • THE EFFECT ON STOCKS’ RETURN VOLATILITY AND PORTFOLIOS’ EXCESS GROWTH RATES
    • THE ESTIMATION ERRORS’ EFFECT ON PORTFOLIO GROWTH RATES INTERPRETED IN THE CONTEXT OF VARIOUS PORTFOLIO WEIGHTING METHODS AND A SIZE EFFECT
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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