5.4 Current research and new alternatives to improve Markowitz model

Question 1

Using Implied cost of capital as a proxy for …

• The ICC is the discount rate from a valuation model that equates …
• The authors use ICC corrected by …
• They demonstrate that mean-variance optimized portfolios based on these estimates outperform on both an … and … basis, the minimum volatility portfolio

Answer 1

expected returns in the Markowitz model

forecasted cash flows to equity with the current stock price

predictable analyst errors as a proxy for expected returns

absolute and a risk-adjusted

Question 2

The ESG-efficient frontier
* The Markowitz model does not take into
consideration investor preferences,
particularly ESG information.

• Pedersen et al. (2020) created a theoretical
  model with a four-fund separation.
• They propose an ESG-efficient frontier,
  showing the highest attainable Sharpe ratio
  for each ESG level.

Answer 2

See slides! (27-31) for a review.