Seeking a Better Portfolio with Industry Recommendations

Abstract

This paper provides novel evidence that investors can build a better performing portfolio by exploiting industry level consensus recommendations. A minimum variance portfolio, combined with consensus recommendations, yields a higher Sharpe ratio and certainty equivalent returns. A minimum variance portfolio with no short-selling constraint consistently outperforms an equally weighted portfolio when exploiting consensus recommendations, which is an innovation compared to the existing literature. Our results suggest that sell-side analysts and brokers provide valuable information in the financial market and we benefit from incorporating the information in the portfolio optimisation.