Can We Give the Maximum Sharpe Ratio Portfolio a Chance?

Winfried Pohlmeier () and Ekaterina Kazak
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Winfried Pohlmeier: University of Konstanz, CoFE, ICEA, Department of Economics

A chapter in Advanced Statistical Methods in Process Monitoring, Finance, and Environmental Science, 2024, pp 337-366 from Springer

Abstract: Abstract This chapter studies the applicability of the maximum Sharpe ratio (MaxSR) portfolio strategy in real-world settings. As shown by Okhrin and Schmidt the plug-in estimated weights show abysmal distributional properties such that it renders an application impossible for financial practitioners. In this chapter we propose a double regularization approach for the MaxSR portfolio strategy based on the bagged pretested portfolio selection (BPPS) algorithm. We show that for certain settings the doubly shrunken portfolio weights strongly mitigate the adverse properties of the plug-in estimated weights and can beat the popular 1/N benchmark strategy.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-69111-9_16

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DOI: 10.1007/978-3-031-69111-9_16

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