Research on Enhancing Portfolio Mean–Variance Optimization Wins 2021 Graham and Dodd Top Award for Excellence

CFA Institute, the global association of investment professionals, announces the winners of the 2021 Graham and Dodd Awards of Excellence. These prestigious awards are bestowed annually for the best research articles published in the Financial Analysts Journal, the flagship publication of CFA Institute, and recognize the contribution of the articles to the practice of investment management.

The Graham and Dodd Awards of Excellence comprise a Top Award for the best article and up to two Scroll Awards. The first award was granted in 1960 to recognize excellence in research and financial writing and to honor Benjamin Graham and David L. Dodd for their enduring contributions to the field of investment analysis.

The 2021 winner of the Graham and Dodd Top Award is Enhanced Portfolio Optimization, Financial Analysts Journal, 77:2, 124-151, by Lasse Heje Pedersen, Abhilash Babu, CFA, and Ari Levine. The research addresses the problem of estimation noise in portfolio mean-variance optimization and identifies a shrinkage parameter that — when applied to the variance-covariance matrix — can alleviate certain estimation issues in the asset allocation process. The authors demonstrate that this enhanced portfolio optimization method results in improved Sharpe ratios (risk-adjusted returns) relative to equal-weighted portfolios and the market portfolio, as well as significant alphas relative to standard factors. The research illustrates that shrinkage is a simple but very powerful solution that can be easily applied by practitioners when conducting portfolio optimization.

The 2021 winner of the Graham and Dodd Scroll Award is Reports of Value's Death May be Greatly Exaggerated, Financial Analysts Journal, 77:1,44-67, by Robert D. Arnott, Campbell R. Harvey, Vitali Kalesnik, and Juhani T. Linnainmaa. The research examines the relative underperformance of “value” stocks compared with “growth” stocks and finds that the relative valuation differential, as well as a failure to adequately capitalize intangible assets — resulting in a potential misclassification of certain value stocks — can provide significant explanations into the underperformance of the value factor. The paper’s explanatory insights and implications have high appeal and practical relevance for investment professionals.

William Goetzmann, Executive Editor of Financial Analysts Journal, comments:

“The Financial Analysts Journal has been publishing seminal contributions to advance the practice of investment management for more than 75 years. The recipients of the 2021 Graham and Dodd Awards of Excellence impressed the Financial Analysts Journal editorial team and panel of judges with the high degree of real-world application in their research, ensuring professionals across the investment industry will find immediate relevancy in these works. We highly commend the winning articles to Journal readers.”

Rhrodri Preece, CFA, Senior Head, Research Center, CFA Institute comments:

"The Graham and Dodd Awards of Excellence winners announced today have excelled in their contributions to the investment profession with innovative research insights that have practical application. Their accomplishments are impressive amidst an abundance of high-quality research published in the Financial Analysts Journal over the course of 2021. We extend our warm congratulations to the recipients."

The research articles for current and previous winners can be accessed here.