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Book cover: Research in Finance

Research in Finance

ISSN: 0196-3821
Series editor(s): Professor John Kensinger

Subject Area: Accounting and Finance

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Identifying securities to buy: The heuristic ri

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Title:Identifying securities to buy: The heuristic ri
Author(s):Manuel Tarrazo
Volume:25 Editor(s): Andrew H. Chen ISBN: 978-1-84855-446-7 eISBN: 978-1-84855-447-4
Citation:Manuel Tarrazo (2009), Identifying securities to buy: The heuristic ri, in Andrew H. Chen (ed.) 25 (Research in Finance, Volume 25), Emerald Group Publishing Limited, pp.229-268
DOI:10.1108/S0196-3821(2009)0000025011 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Article type:Chapter Item
Abstract:In this study, we analyze the power of the individual return-to-volatility security performance heuristic (ri/stdi) to simplify the identification of securities to buy and, consequently, to form the optimal no short sales mean–variance portfolios. The heuristic ri/stdi is powerful enough to identify the long and shorts sets. This is due to the positive definiteness of the variance–covariance matrix – the key is to use the heuristic sequentially. At the investor level, the heuristic helps investors to decide what securities to consider first. At the portfolio level, the heuristic may help us find out whether it is a good idea to invest in equity to begin with. Our research may also help to integrate individual security analysis into portfolio optimization through improved security rankings.

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