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Portfolio optimization when expected stock returns are determined by exposure to risk

Carl Lindberg (Institutionen för matematiska vetenskaper, matematisk statistik)
Bernoulli (1350-7265). Vol. 15 (2009), 2, p. 464-474.
[Artikel, refereegranskad vetenskaplig]

It is widely recognized that when classical optimal strategies are applied with parameters estimated from data, the resulting portfolio weights are remarkably volatile and unstable over time. The predominant explanation for this is the difficulty of estimating expected returns accurately. In this paper, we modify the n stock Black-Scholes model by introducing a new parametrization of the drift rates. We solve Markowitz' continuous time portfolio problem in this framework. The optimal portfolio weights correspond to keeping 1/n of the wealth invested in stocks in each of the n Brownian motions. The strategy is applied out-of-sample to a large data set. The portfolio weights are stable over time and obtain a significantly higher Sharpe ratio than the classical 1/n strategy.

Nyckelord: 1/n strategy, Black-Scholes model, expected stock returns, Markowitz', problem, portfolio optimization, ranks, continuous-time model, selection

Denna post skapades 2010-03-01.
CPL Pubid: 116733


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Institutioner (Chalmers)

Institutionen för matematiska vetenskaper, matematisk statistik (2005-2016)


Matematisk statistik

Chalmers infrastruktur