Markowitz allocation‐fixed income securities

The Markowitz allocation model has not been properly tested with individual corporate bonds. Several authors have argued theoretically that the expectations necessary for the model cannot be formed from ex post time series data because the distribution of bond returns is not stationary. A methodology under which corporate bonds can be included in tests of the Markowitz model is presented in this study. Five sets of naive expectations are used, and as the distribution problem is removed from the data, the risk‐adjusted performance of the Markowitz model becomes potentially very useful.