Exploring parsimonious principles that unify active portfolio selection (I): model

Wing Cheung

Quantitative Finance, 2026, vol. 26, issue 5, 685-706

Abstract: This research unifies active portfolio selection through (1) Subjective Allocation Rule (SAR)-based allocation and (2) Minimum Tracking Error (MTE)-guided mimicking within a Bayesian Allocation Framework that integrates qualitative and quantitative beliefs into alpha-generating portfolios. Portfolio selection is modelled as view-driven, feedback-responsive rationality that reconciles normative and descriptive paradigms, with diverse investor behaviours emerging as local optima shaped by cognition, skill, and subjectivity. Empirical results show that when subjectivity aligns with predictive skill, portfolios outperform mean-variance benchmarks. This first paper focuses on the structural formulation.

Date: 2026
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DOI: 10.1080/14697688.2026.2633449

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