Mean-variance optimization and the cross-section of stock returns

Vaibhav Lalwani

Global Finance Journal, 2025, vol. 66, issue C

Abstract: Currently, popular asset pricing factors utilize ad hoc weighting procedures. By synthesizing mean-variance theory with multi-factor pricing, we generate an asset-pricing factor using optimal portfolio weights that maximize the Sharpe ratio. Our factor works out-of-sample and can be utilized by a real-time investor. We show that the optimal factor is priced in the cross-section of stock returns even after controlling for nine other popular factors in the literature. The optimal factor is priced in international stock markets and can also explain the cross-section of bond returns.

Keywords: Mean-variance optimization; Out-of-sample; Optimal factor; Asset-pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1044028325000572
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:66:y:2025:i:c:s1044028325000572

DOI: 10.1016/j.gfj.2025.101130

Access Statistics for this article

Global Finance Journal is currently edited by Manuchehr Shahrokhi

More articles in Global Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().