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Composition of robust equity portfolios

Jang Ho Kim, Woo Chang Kim and Frank Fabozzi ()

Finance Research Letters, 2013, vol. 10, issue 2, 72-81

Abstract: Robust portfolios resolve the sensitivity issue identified as a concern in implementing mean–variance analysis. Because robust approaches are not widely used in practice due to a limited understanding regarding the portfolios constructed from these methods, we present an analysis of the composition of robust equity portfolios. We find that compared to the Markowitz mean–variance formulation, robust optimization formulations form portfolios that contain a fewer number of stocks, avoid large exposure to individual stocks, have higher portfolio beta, and show low correlation between weight and beta of the stocks composing the portfolio. These properties are also found for global minimum-variance portfolios.

Keywords: Robust portfolio; Mean–variance model; Global minimum-variance portfolio; Stock beta; Ellsberg paradox (search for similar items in EconPapers)
JEL-codes: G11 C61 C63 C65 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:finlet:v:10:y:2013:i:2:p:72-81