Navigating Uncertainty: Enhancing Markowitz Asset Allocation Strategies through Out-of-Sample Analysis

Vijaya Krishna Kanaparthi ()
Additional contact information
Vijaya Krishna Kanaparthi: Microsoft Corporation, 7000 State Highway 161,Building LC1, Irving, TX 75039, USA

FinTech, 2024, vol. 3, issue 1, 1-22

Abstract: This research paper explores the complicated connection between uncertainty and the Markowitz asset allocation framework, specifically investigating how mistakes in estimating parameters significantly impact the performance of strategies during out-of-sample evaluations. Drawing on relevant literature, we highlight the importance of our findings. In contrast to common assumptions, our study systematically compares these approaches with alternative allocation strategies, providing insights into their performance in both anticipated and real-world out-of-sample events. The research demonstrates that incorporating methods to address uncertainty enhances the Markowitz framework, challenging the idea that longer sample periods always lead to better outcomes. Notably, imposing a short-sale constraint proves to be a valuable strategy for improving the effectiveness of the initial portfolio. While revealing the complexities of uncertainty, our study also highlights the surprising resilience of basic asset allocation approaches, such as equally weighted allocation, which exhibit commendable performance. Methodologically, we employ a rigorous out-of-sample evaluation, emphasizing the practical implications of parameter uncertainty on asset allocation outcomes. Investors, portfolio managers, and financial practitioners can use these insights to refine their strategies, considering the dynamic nature of markets and the limitations internal to the traditional models. In conclusion, this paper goes beyond the theoretical scope to provide substantial value in enhancing real-world investment decisions.

Keywords: expected events; equally weighted allocation; Markowitz asset allocation; out-of-sample events (search for similar items in EconPapers)
JEL-codes: C6 F3 G O3 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2674-1032/3/1/10/pdf (application/pdf)
https://www.mdpi.com/2674-1032/3/1/10/ (text/html)

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:gam:jfinte:v:3:y:2024:i:1:p:10-172:d:1340586

Access Statistics for this article

FinTech is currently edited by Ms. Lizzy Zhou

More articles in FinTech from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().