Best-Case Scenario Robust Portfolio: Evidence from China Stock Market

Kaiqiang An, Guiyu Zhao, Jinjun Li, Jingsong Tian, Lihua Wang, Liang Xian and Chen Chen ()
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Kaiqiang An: China West Normal University
Guiyu Zhao: China West Normal University
Jinjun Li: Sichuan Tourism University
Jingsong Tian: China West Normal University
Lihua Wang: China West Normal University
Liang Xian: Chengdu Sport University
Chen Chen: Sichuan Tourism University

Asia-Pacific Financial Markets, 2023, vol. 30, issue 2, No 2, 297-322

Abstract: Abstract Stock markets are flooded with various uncertainties such as stock market scenarios, especially the input parameters of stock portfolio models. It is hard for stock market investments to jointly deal with them. Although robust portfolio is the prevailing portfolio policy handling with uncertainties, it always focuses on the worst-case scenario of all the possible realizations of uncertain input parameters, resulting in the optimal portfolios considerably conservative as well as the portfolio performances very inferior. To this end, based on Markowitz’s mean–variance (MV) model, this paper builds the new robust portfolio model (RMV-best) from the innovative perspective of best-case scenario, exactly contrary to the model based on the worst-case scenario (RMV-worst). Furthermore, stock market scenarios which always shift uncertainly show the periodic characteristics, and can be divided into three movement statuses: the bull, the bear and the steady. To verify the consistency of RMV-best, RMV-worst and MV portfolio policies over the different motion periods and identify the differences of these portfolio policies at various movement statuses, the mix data including two motion periods and three industry sectors is employed. Eventually, empirical results indicate that RMV-best is always the most favorable portfolio policy at the bull and the bear market, while MV can produce more profitable portfolios at the steady market over two motion periods. However, the drawbacks of RMV-worst are also confirmed in this study.

Keywords: Worst-case scenario; Best-case scenario; Robust portfolio; Uncertainties; MV (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10690-022-09375-7

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