A Global-Optimal Portfolio Theory beyond the R-s Model

Yifan Liu and Shi-Dong Liang ()
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Yifan Liu: School of Physics, and State Key Laboratory of Optoelectronic Material and Technology, Sun Yat-sen University, Guangzhou 510275, China; School of Economics, Fudan University, Shanghai 200433, China
Shi-Dong Liang: School of Physics, and State Key Laboratory of Optoelectronic Material and Technology, Sun Yat-sen University, Guangzhou 510275, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2020, vol. 15, issue 1, 124-139

Abstract: Deviations from the efficient market hypothesis allow us to benefit from risk premium in ?nancial markets. We propose a three-pronged (R, s, H) theory to generalize the (R, s) model and present the formulation of a three-pronged (R, s, H) model and its Pareto-optimal solution. We de?ne the local-optimal weights (wR, ws,wH) that construct the triangle of the quasi-optimal investing subspace and further de?ne the centroid or incenter of the triangle as the optimal investing weights that optimize the mean return, risk premium, and volatility risk. By numerically investigating the Chinese stock market, we demonstrate the validity of this formulation method. The proposed theory provides investors of different styles (conservative or aggressive) an efficient way to design portfolios in ?nancial markets to maximize the mean return while minimizing the volatility risk.

Keywords: portfolio; R-s model; Hurst exponent; risk premium; volatility; Chinese stock market (search for similar items in EconPapers)
JEL-codes: C02 C32 C51 C61 G11 G14 G32 (search for similar items in EconPapers)
Date: 2020
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