ApplyingGreyForecastingModelontheInvestment.docVIP

Applying Grey Forecasting Model on the Investment Performance of Markowitz Efficiency Frontier: A Case of the Dow Jones Industry Index Alex Kung-Hsiung Chang* Shin-Wei Huang** *Professor of Department of Business Administration **Graduate Student of Department of Business Administration National Pingtung University of Science and Technology Taiwan, R.O.C TEL: +886-8-7740374 E-Mail: bear419@.tw wei7689@.tw ABSTRACT This paper uses a grey forecasting model GM(1,1) on improving the investment performance of classical Markowitz efficiency frontier’s investment portfolio using the component securities of Dow Jones Industry Index from 1999 to 2005 as the samples. Using grey Markowitz efficiency frontier’s investment portfolio models, we establish a more stable and correct connection between ex-ante model and ex-post performance. The results show the Grey Markowitz efficiency frontier investment portfolio model could improve the investment performance effectively and stably. Keywords: grey forecasting model GM(1,1), efficiency frontier, investment portfolio 1. Introduction The separation theorem established by Markowitz (1952) was the foundation of modern invention theory. The capital asset pricing model (CAPM) became the important pricing model on assets after florence of Tobin (1958) and Sharpe (1964). Due to the close relationship between the systematic risk coefficient β and asset’s return, a lot of papers have discussed it since the 1960s. Classic CAPM founded on ex-ante sincerely hypothesis, cause to a problem of using a simple model to estimate a complex economics. That confuses many scholars. In 1970s, Blume found that beta estimation was greater than the real figure if it had a big beta, and would be smaller if it had a small one. A lot of empirical research found a paradox between the ex-ante Markowitz efficiency portfolio model and the real investment performance after that.（see Douglas, 1969; Chan and Lakonishok, 1992）The noise between that resulted f