Journal of Banking & Finance Vol. 37 No. 4 2013
On portfolio optimization: Imposing the right constraints
Abstract
We reassess the recent finding that no established portfolio strategy outperforms the naively diversified portfolio, 1/N, by developing a constrained minimum-variance portfolio strategy on a shrinkage theory based framework. Our results show that our constrained minimum-variance portfolio yields significantly lower out-of-sample variances than many established minimum-variance portfolio strategies. Further, we observe that our portfolio strategy achieves higher Sharpe ratios than 1/N, amounting to an average Sharpe ratio increase of 32.5% across our six empirical datasets. We find that our constrained minimum-variance strategy is the only strategy that achieves the goal of improving the Sharpe ratio of 1/N consistently and significantly. At the same time, our developed portfolio strategy achieves a comparatively low turnover and exhibits no excessive short interest.
- DOI
- 10.1016/j.jbankfin.2012.11.020
- Volume
- 37
- Issue
- 4
- Pages
- 1232-1242
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref