On portfolio optimization: Imposing the right constraints

Patrick Behr, Andre Guettler and Felix Miebs

Journal of Banking & Finance, 2013, vol. 37, issue 4, 1232-1242

Abstract: We reassess the recent finding that no established portfolio strategy outperforms the naively diversified portfolio, 1/N, by developing a constrained minimum-variance portfolio strategy on a shrinkage theory based framework. Our results show that our constrained minimum-variance portfolio yields significantly lower out-of-sample variances than many established minimum-variance portfolio strategies. Further, we observe that our portfolio strategy achieves higher Sharpe ratios than 1/N, amounting to an average Sharpe ratio increase of 32.5% across our six empirical datasets. We find that our constrained minimum-variance strategy is the only strategy that achieves the goal of improving the Sharpe ratio of 1/N consistently and significantly. At the same time, our developed portfolio strategy achieves a comparatively low turnover and exhibits no excessive short interest.

Keywords: Portfolio optimization; Shrinkage; Mean squared error; Bootstrap (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (42)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:4:p:1232-1242

DOI: 10.1016/j.jbankfin.2012.11.020

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