A Communication Theoretic Interpretation of Modern Portfolio Theory Including Short Sales, Leverage and Transaction Costs

Giorgio Arici, Marco Dalai, Riccardo Leonardi and Arnaldo Spalvieri
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Giorgio Arici: Department of Information Engineering, University of Brescia, Via Branze 38, 25123 Brescia, Italy
Marco Dalai: Department of Information Engineering, University of Brescia, Via Branze 38, 25123 Brescia, Italy
Riccardo Leonardi: Department of Information Engineering, University of Brescia, Via Branze 38, 25123 Brescia, Italy
Arnaldo Spalvieri: Department of Electronics, Information and BioEngineering, Politecnico di Milano, Via Ponzio 34/5, 20133 Milan, Italy

JRFM, 2018, vol. 12, issue 1, 1-11

Abstract: Modern Portfolio Theory is the ground upon which most works in portfolio optimization context find their foundations. Many studies attempt to extend the Modern Portfolio Theory to include short sale, leverage and transaction costs, features not considered in Markowitz’s seminal work from 1952. The drawback of such theories is that they complicate considerably the simplicity of the original technique. Here, we propose a simple and unified method, which takes inspiration from, and shows connections with the matched filter theory in communications, to evaluate the best portfolio allocation with the possibility of including a leverage factor and short sales. Finally, we extend the presented method to also consider the transaction costs.

Keywords: modern portfolio theory; portfolio optimization; matched filter (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
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