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Sparse Mean-Variance Portfolios: A Penalized Utility Approach

David Puelz, P. Richard Hahn and Carlos M. Carvalho

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Abstract: This paper considers mean-variance optimization under uncertainty, specifically when one desires a sparsified set of optimal portfolio weights. From the standpoint of a Bayesian investor, our approach produces a small portfolio from many potential assets while acknowledging uncertainty in asset returns and parameter estimates. We demonstrate the procedure using static and dynamic models for asset returns.

New Economics Papers: this item is included in nep-rmg and nep-upt
Date: 2015-12, Revised 2016-10
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Handle: RePEc:arx:papers:1512.02310