Mean-Variance Model

Definition

A Mean-Variance Model is any of the underlying analytic portfolio models that underpin wikipedia:Modern portfolio theory. A mean-variance model is built on a limited set of parameters namely, mean, standard deviation and correlations.

Advantages

The small and intuitive number of parameters makes the calibration of these models relatively straightforward. Mean-variance models produce reasonable return projections, have nice mathematical properties and are easy to use, interpret and understand.

Issues and Challenges

Mean-variance models present problems when

• dealing with business applications that require analysis over multiperiod time horizons
• when the analysis requires direct access to economic variables
• when the impact of scenarios is highly non-linear, exposing the limitations of simple distributional assumptions