An alternative strategy for balancing profit maximization and risk reduction

Youssef El Khatib and Farangiz Mukhamedova

PLOS ONE, 2026, vol. 21, issue 5, 1-21

Abstract: Portfolio diversification is a central theme in modern investment theory. We revisit the classic return–risk trade-off and propose an alternative objective Qλ(w)=μ⊤w+λ(w⊤Σw)−1/2 that balances higher expected returns with a direct penalty on portfolio volatility via the inverse standard deviation. This objective belongs to the axiomatic class of mean–variance preferences (as formalised by [1] for additively separable forms) and admits tractable solutions, including a closed-form characterisation in the two-asset case. In rolling out-of-sample backtests on standard Fama–French equity portfolios with realistic trading costs and long-only constraints, Qλ delivers statistically significantly lower realised volatility (paired t-test p

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0348577

DOI: 10.1371/journal.pone.0348577

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