How Not To Do Mean-Variance Analysis

TL;DR

This paper demonstrates common pitfalls in ex post mean-variance analysis using biotech ETFs, highlighting how standard practices can lead to misleading investment insights.

Contribution

It critically examines prevalent methods of mean-variance analysis and illustrates their flaws through real market data, advocating for improved approaches.

Findings

Ex post mean-variance analysis can be misleading when applied naively.

Standard practices often ignore market realities, leading to incorrect conclusions.

Using biotech ETFs, the paper shows how typical analysis methods fail to capture true risk-return profiles.

Abstract

We use the 2014 market history of two high-returning biotechnology exchange-traded funds to illustrate how ex post mean-variance analysis should not be done. Unfortunately, the way it should not be done is the way it generally is done -- to our knowledge.