Portfolio optimization when expected stock returns are determined by exposure to risk
Artikel i vetenskaplig tidskrift, 2009

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.

Black-Scholes model

portfolio optimization

continuous-time model

Markowitz'

ranks

problem

selection

expected stock returns

1/n strategy

Författare

CARL LINDBERG

Göteborgs universitet

Chalmers, Matematiska vetenskaper, matematisk statistik

Bernoulli

1350-7265 (ISSN)

Vol. 15 2 464-474

Ämneskategorier

Sannolikhetsteori och statistik

DOI

10.3150/08-BEJ163