Strategies for choosing an uncertainty budget in log-robust portfolio management

Yuntaek Pae and Navid Sabbaghi ()
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Yuntaek Pae: Central Washington University, 2400 S 240th Street, Des Moines, WA 98198, United States
Navid Sabbaghi: Saint Mary’s College, 1928 Saint Mary’s Road, Moraga, CA 94575, United States

International Journal of Financial Engineering (IJFE), 2019, vol. 06, issue 02, 1-24

Abstract: This paper proposes six strategies for deciding upon “budget of uncertainty” parameters as input to a sequence of robust (portfolio) optimization problems over time, the solutions of which are a sequence of portfolios (i.e., a portfolio trajectory). Using 10 French Library datasets,1 the performance of the portfolio trajectories resulting from these strategies are compared with one another and the 1/n strategy. Before accounting for trading costs, all strategies result in portfolio trajectories that produce higher profit than the 1/n strategy. Even after accounting for trading costs (of 1% of trading volume), two of the strategies result in portfolio trajectories that have higher profit and lower risk compared to the 1/n strategy. Furthermore, we find that equal-weighted indices are better assets to manage than value-weighted indices in terms of achieving larger returns and lower risks.

Keywords: Portfolio; optimization; uncertainty (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2424786319500117

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