The portfolio strategy and hedging: A spectrum perspective on mean-variance theory

This paper aims to establish a portfolio strategy using information of lead-lag relationship. The efficient frontier in mean-variance theory has confirmed that the spectrum strategy established by the lead-lag relationship yields superior performance assuming the same volatility. And then we construct the spectrum portfolios based on two approaches: a recursive approach, which uses a recursive method in the lead-lag relationship, and a joint approach, which combines two lead-lag relationships. The effect of the spectrum strategy using mutual fund data from 1999 through 2009 is examined. The results indicate that the spectrum portfolio has a superior performance as compared to the benchmark with both approaches. Furthermore, the spectrum portfolio by recursive approach maintains superior performance in hedging.