Deciphering robust portfolios

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

Journal of Banking & Finance, 2014, vol. 45, issue C, 1-8

Abstract: Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the Markowitz mean–variance model. Although much effort has been put into forming robust portfolios, there have not been many attempts to analyze the characteristics of portfolios formed from robust optimization. We investigate the behavior of robust portfolios by analytically describing how robustness leads to higher dependency on factor movements. Focusing on the robust formulation with an ellipsoidal uncertainty set for expected returns, we show that as the robustness of a portfolio increases, its optimal weights approach the portfolio with variance that is maximally explained by factors.

Keywords: Robust portfolio optimization; Mean–variance model; Fundamental factors (search for similar items in EconPapers)
JEL-codes: C44 C61 G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:45:y:2014:i:c:p:1-8

DOI: 10.1016/j.jbankfin.2014.04.021

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