Limiting out-of-sample performance of optimal unconstrained portfolios

Luis Chavez-Bedoya and John Birge

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: This paper studies the out-of-sample Sharpe ratio of an unconstrained portfolio that combines the global minimum-variance with a hedge portfolio. Furthermore, we investigate how this ratio behaves as the number of risky assets and observations approaches infinity while maintaining a constant ratio. Under these conditions, it becomes possible to simultaneously account for estimation risk and achieve analytical tractability when optimizing the out-of-sample Sharpe ratio. This analysis also provides valuable insights to enhance out-of-sample performance in the finite case by introducing additional deterministic factors to the portfolio components.

Keywords: Portfolio optimization; Estimation risk; Out-of-sample Sharpe ratio; Global minimum-variance portfolio; Hedge portfolio (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324009164

DOI: 10.1016/j.frl.2024.105886

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