Sparse and robust portfolio selection via semi-definite relaxation

Yongjae Lee, Min Jeong Kim, Jang Ho Kim, Ju Ri Jang and Woo Chang Kim

Journal of the Operational Research Society, 2020, vol. 71, issue 5, 687-699

Abstract: In investment management, especially for automated investment services, it is critical for portfolios to have a manageable number of assets and robust performance. First, portfolios should not contain too many assets in order to reduce the management fees, transaction costs, and taxes. Second, portfolios should be robust as investment environments change rapidly. In this study, therefore, we propose two convex portfolio selection models that provide portfolios that are sparse and robust. We first perform semi-definite relaxation to develop a sparse mean-variance portfolio selection model, and further extend the model by using L2-norm regularization and worst-case optimization to formulate two sparse and robust portfolio selection models. Empirical analyses with historical stock returns demonstrate the effectiveness of the proposed models in forming sparse and robust portfolios.

Date: 2020
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Citations: View citations in EconPapers (14)

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DOI: 10.1080/01605682.2019.1581408

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