Minimum-variance portfolio optimization: an asset pricing model approach

Yao Han, James W. Kolari and Wei Liu

Applied Economics, 2025, vol. 57, issue 57, 9823-9836

Abstract: This paper employs novel asset pricing model methods to construct the global minimum-variance portfolio G. Out-of-sample analyses of U.S. stock returns show that optimized G portfolios have relatively higher expected returns, lower variance, and higher Sharpe ratios than those based on traditional variance-covariance matrix estimation methods. Robustness checks confirm these findings and show that our G portfolio has lower variance than currently available minimum-variance exchange traded funds (ETFs). We conclude that asset pricing models can be used to build high performing G portfolios. Implications to portfolio management are discussed.

Date: 2025
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DOI: 10.1080/00036846.2024.2423903

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