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V. DeMiguel et al., “Improving Portfolio Selection Using Option-Implied Volatility and Skewness,” (June 17, 2012). Journal of Financial and Quantitative Analysis, (working series, presented by Yulia Plyakha at the OptionMetrics Research Conference 2012).

V. DeMiguel et al., “Improving Portfolio Selection Using Option-Implied Volatility and Skewness,” (June 17, 2012). Journal of Financial and Quantitative Analysis, (working series, presented by Yulia Plyakha at the OptionMetrics Research Conference 2012).

Abstract: Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful for improving their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows that using option-implied volatility helps to reduce portfolio volatility. Using option-implied correlation does not improve any of the metrics. Using option-implied volatility, risk-premium, and skewness to adjust expected returns leads to a substantial improvement in the Sharpe ratio, even after prohibiting shortsales and accounting for transactions costs.