Download or read book Mean Variance Optimization Using Forward Looking Return Estimates written by Patrick Bielstein and published by . This book was released on 2017 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite its theoretical appeal, Markowitz mean-variance portfolio optimization is plagued by practical issues. It is especially difficult to obtain reliable estimates of a stock's expected return. Recent research has therefore focused on minimum volatility portfolio optimization, which implicitly assumes that expected returns for all assets are equal. We argue that investors are better off using the implied cost of capital based on analysts' earnings forecasts as a forward-looking return estimate. Correcting for predictable analyst forecast errors, we demonstrate that mean-variance optimized portfolios based on these estimates outperform on both an absolute and a risk-adjusted basis the minimum volatility portfolio as well as naive benchmarks, such as the value-weighted and equally-weighted market portfolio. The results continue to hold when extending the sample to international markets, using different methods for estimating the forward-looking return, including transaction costs, and using different optimization constraints.

Download or read book An Improved Estimation to Make Markowitz s Portfolio Optimization Theory Users Friendly and Estimation Accurate with Application on the US Stock Market Investment written by Pui-lam Leung and published by . This book was released on 2016 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using the Markowitz mean-variance portfolio optimization theory, researchers have shown that the traditional estimated return greatly overestimates the theoretical optimal return, especially when the dimension to sample size ratio p/n is large. Bai, Liu, and Wong (2009) propose a bootstrap-corrected estimator to correct the overestimation, but there is no closed form for their estimator. To circumvent this limitation, this paper derives explicit formulas for the estimator of the optimal portfolio return. We also prove that our proposed closed-form return estimator is consistent when n rightarrow infty and p/n rightarrow y in (0,1). Our simulation results show that our proposed estimators dramatically outperform traditional estimators for both the optimal return and its corresponding allocation under different values of p/n ratios and different inter-asset correlations p, especially when p/n is close to 1. We also find that our proposed estimators perform better than the bootstrap-corrected estimators for both the optimal return and its corresponding allocation. Another advantage of our improved estimation of returns is that we can also obtain an explicit formula for the standard deviation of the improved return estimate and it is smaller than that of the traditional estimate, especially when p/n is large. In addition, we illustrate the applicability of our proposed estimate on the US stock market investment.

Download or read book Efficient Asset Management written by Richard O. Michaud and published by Oxford University Press. This book was released on 2008-03-03 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt: In spite of theoretical benefits, Markowitz mean-variance (MV) optimized portfolios often fail to meet practical investment goals of marketability, usability, and performance, prompting many investors to seek simpler alternatives. Financial experts Richard and Robert Michaud demonstrate that the limitations of MV optimization are not the result of conceptual flaws in Markowitz theory but unrealistic representation of investment information. What is missing is a realistic treatment of estimation error in the optimization and rebalancing process. The text provides a non-technical review of classical Markowitz optimization and traditional objections. The authors demonstrate that in practice the single most important limitation of MV optimization is oversensitivity to estimation error. Portfolio optimization requires a modern statistical perspective. Efficient Asset Management, Second Edition uses Monte Carlo resampling to address information uncertainty and define Resampled Efficiency (RE) technology. RE optimized portfolios represent a new definition of portfolio optimality that is more investment intuitive, robust, and provably investment effective. RE rebalancing provides the first rigorous portfolio trading, monitoring, and asset importance rules, avoiding widespread ad hoc methods in current practice. The Second Edition resolves several open issues and misunderstandings that have emerged since the original edition. The new edition includes new proofs of effectiveness, substantial revisions of statistical estimation, extensive discussion of long-short optimization, and new tools for dealing with estimation error in applications and enhancing computational efficiency. RE optimization is shown to be a Bayesian-based generalization and enhancement of Markowitz's solution. RE technology corrects many current practices that may adversely impact the investment value of trillions of dollars under current asset management. RE optimization technology may also be useful in other financial optimizations and more generally in multivariate estimation contexts of information uncertainty with Bayesian linear constraints. Michaud and Michaud's new book includes numerous additional proposals to enhance investment value including Stein and Bayesian methods for improved input estimation, the use of portfolio priors, and an economic perspective for asset-liability optimization. Applications include investment policy, asset allocation, and equity portfolio optimization. A simple global asset allocation problem illustrates portfolio optimization techniques. A final chapter includes practical advice for avoiding simple portfolio design errors. With its important implications for investment practice, Efficient Asset Management 's highly intuitive yet rigorous approach to defining optimal portfolios will appeal to investment management executives, consultants, brokers, and anyone seeking to stay abreast of current investment technology. Through practical examples and illustrations, Michaud and Michaud update the practice of optimization for modern investment management.

Download or read book Factor Based Portfolio Optimization written by Jun Kyung Auh and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that a parsimonious factor model can alleviate the problems of using raw historical data subject to large idiosyncratic noise in mean-variance portfolio optimization. Through the factor structure, we incorporate forward-looking information into the expected returns, exploiting a set of variables known to predict the aggregate factor from prior studies. Estimating parameters in a manner consistent with the theoretical assumption that the mean and variance correspond to future return distributions leads to better out-of-sample performance, accentuating the importance of feeding proper information.

Download or read book Introduction to Risk Parity and Budgeting written by Thierry Roncalli and published by CRC Press. This book was released on 2016-04-19 with total page 430 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although portfolio management didn't change much during the 40 years after the seminal works of Markowitz and Sharpe, the development of risk budgeting techniques marked an important milestone in the deepening of the relationship between risk and asset management. Risk parity then became a popular financial model of investment after the global fina

Download or read book Do Asset Demand Functions Optimize Over the Mean and Variance of Real Returns written by Charles Engel and published by . This book was released on 1985 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: International asset demands are functions of expected returns.Optimal portfolio theory tells us that the coefficients in this relationship depend on the variance-covariance matrix of real returns.But previous estimates of the optimal portfolio (1) assume expected returns constant and (2) are not set up to test the hypothesis of mean-variance optimization. We use maximum likelihood estimation to impose a constraint between the coefficients and the error variance-covariance matrix. For a portfolio of six currencies, we are able statistically to reject the constraint. Evidently investors are either not sophisticated enough to maximize a function of the mean and variance of end-of-period wealth, or else are too sophisticated to do so

Download or read book Approaching Mean Variance Efficiency for Large Portfolios written by Mengmeng Ao and published by . This book was released on 2018 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a new approach to constructing optimal mean-variance portfolios. The approach relies on a novel unconstrained regression representation of the mean-variance optimization problem combined with high-dimensional sparse-regression methods. Our estimated portfolio, under a mild sparsity assumption, controls the risk and attains the maximum expected return as both the numbers of assets and observations grow. The superior properties of our approach are demonstrated through comprehensive simulation and empirical analysis. Notably, we fi nd that investing in individual stocks in addition to the Fama-French three factor portfolios using our strategy leads to substantially improved performance.

Download or read book Systematic Trading written by Robert Carver and published by Harriman House Limited. This book was released on 2015-09-14 with total page 247 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is not just another book with yet another trading system. This is a complete guide to developing your own systems to help you make and execute trading and investing decisions. It is intended for everyone who wishes to systematise their financial decision making, either completely or to some degree. Author Robert Carver draws on financial theory, his experience managing systematic hedge fund strategies and his own in-depth research to explain why systematic trading makes sense and demonstrates how it can be done safely and profitably. Every aspect, from creating trading rules to position sizing, is thoroughly explained. The framework described here can be used with all assets, including equities, bonds, forex and commodities. There is no magic formula that will guarantee success, but cutting out simple mistakes will improve your performance. You'll learn how to avoid common pitfalls such as over-complicating your strategy, being too optimistic about likely returns, taking excessive risks and trading too frequently. Important features include: - The theory behind systematic trading: why and when it works, and when it doesn't. - Simple and effective ways to design effective strategies. - A complete position management framework which can be adapted for your needs. - How fully systematic traders can create or adapt trading rules to forecast prices. - Making discretionary trading decisions within a systematic framework for position management. - Why traditional long only investors should use systems to ensure proper diversification, and avoid costly and unnecessary portfolio churn. - Adapting strategies depending on the cost of trading and how much capital is being used. - Practical examples from UK, US and international markets showing how the framework can be used. Systematic Trading is detailed, comprehensive and full of practical advice. It provides a unique new approach to system development and a must for anyone considering using systems to make some, or all, of their investment decisions.

Download or read book Robust Portfolio Optimization and Management written by Frank J. Fabozzi and published by John Wiley & Sons. This book was released on 2007-04-27 with total page 513 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Robust Portfolio Optimization and Management "In the half century since Harry Markowitz introduced his elegant theory for selecting portfolios, investors and scholars have extended and refined its application to a wide range of real-world problems, culminating in the contents of this masterful book. Fabozzi, Kolm, Pachamanova, and Focardi deserve high praise for producing a technically rigorous yet remarkably accessible guide to the latest advances in portfolio construction." --Mark Kritzman, President and CEO, Windham Capital Management, LLC "The topic of robust optimization (RO) has become 'hot' over the past several years, especially in real-world financial applications. This interest has been sparked, in part, by practitioners who implemented classical portfolio models for asset allocation without considering estimation and model robustness a part of their overall allocation methodology, and experienced poor performance. Anyone interested in these developments ought to own a copy of this book. The authors cover the recent developments of the RO area in an intuitive, easy-to-read manner, provide numerous examples, and discuss practical considerations. I highly recommend this book to finance professionals and students alike." --John M. Mulvey, Professor of Operations Research and Financial Engineering, Princeton University

Download or read book Implied Expected Returns and the Choice of a Mean Variance Efficient Portfolio Proxy written by David Ardia and published by . This book was released on 2018 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Implied expected returns are the expected returns for which a supposedly mean-variance efficient portfolio is effectively efficient given a covariance matrix. We analyze the statistical properties of monthly implied expected return estimates and study their sensitivity to the choice of a mean-variance efficient portfolio proxy. Over the period January 1984 to December 2012 and for the universe of S&P 100 stocks we find that the largest gains are in terms of stability of the return forecasts. The use of a maximum diversification or equal-risk-contribution portfolio as proxy reduces significantly the cross-section and time series dispersion in the implied expected return forecasts and leads to a small improvement in forecast precision, compared to using a market capitalization, fundamental value or equal weighting scheme. For all proxies considered, the implied expected return estimates outperform the time series model based forecasts in terms of stability and forecast precision.

Download or read book Optimality of Naive Investment Strategies in Dynamic Mean Variance Optimization Problems with Multiple Priors written by Yuki Shigeta and published by . This book was released on 2019 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study dynamic mean-variance optimization problems with multiple priors. We introduce two types of multiple priors, the priors for expected returns and the priors for covariances. Our framework suggests that the global minimum-variance portfolio is optimal when the investor strongly doubts the correctness of the estimated expected returns, and the equally weighted portfolio is optimal when the investor strongly doubts the correctness of the estimated covariances. From the back tests, we find that for some data sets, the strategy that invests in the global minimum-variance portfolio or the equally weighted portfolio considering the market condition is more efficient than the other mean-variance efficient portfolios.

Download or read book Portfolio Management in Practice Volume 2 written by CFA Institute and published by John Wiley & Sons. This book was released on 2020-01-11 with total page 640 pages. Available in PDF, EPUB and Kindle. Book excerpt: Discover the latest essential resource on asset allocation for students and investment professionals. Part of the CFA Institute’s three-volume Portfolio Management in Practice series, Asset Allocation offers a deep, comprehensive ­treatment of the asset allocation process and the underlying theories and markets that support it. As the second volume in the series, Asset Allocation meets the needs of both graduate-level students focused on finance and industry professionals looking to become more dynamic investors. Filled with the insights and industry knowledge of the CFA Institute’s subject matter experts, Asset Allocation effectively blends theory and practice while helping the reader expand their skillsets in key areas of interest. This volume provides complete coverage on the following topics: Setting capital market expectations to support the asset allocation process Principles and processes in the asset allocation process, including handling ESG-integration and client-specific constraints Allocation beyond the traditional asset classes to include allocation to alternative investments The role of exchange-traded funds can play in implementing investment strategies An integrative case study in portfolio management involving a university endowment To further enhance your understanding of tools and techniques explored in Asset Allocation, don’t forget to pick up the Portfolio Management in Practice, Volume 2: Asset Allocation Workbook. The workbook is the perfect companion resource containing learning outcomes, summary overview sections, and challenging practice questions that align chapter-by-chapter with the main text.

Download or read book Risk Based and Factor Investing written by Emmanuel Jurczenko and published by Elsevier. This book was released on 2015-11-24 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a compilation of recent articles written by leading academics and practitioners in the area of risk-based and factor investing (RBFI). The articles are intended to introduce readers to some of the latest, cutting edge research encountered by academics and professionals dealing with RBFI solutions. Together the authors detail both alternative non-return based portfolio construction techniques and investing style risk premia strategies. Each chapter deals with new methods of building strategic and tactical risk-based portfolios, constructing and combining systematic factor strategies and assessing the related rules-based investment performances. This book can assist portfolio managers, asset owners, consultants, academics and students who wish to further their understanding of the science and art of risk-based and factor investing. Contains up-to-date research from the areas of RBFI Features contributions from leading academics and practitioners in this field Features discussions of new methods of building strategic and tactical risk-based portfolios for practitioners, academics and students

Download or read book Portfolio Management in Practice Volume 1 written by CFA Institute and published by John Wiley & Sons. This book was released on 2020-11-11 with total page 1328 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio Management in Practice, Volume 1: Investment Management delivers a comprehensive overview of investment management for students and industry professionals. As the first volume in the CFA Institute’s new Portfolio Management in Practice series, Investment Management offers professionals looking to enhance their skillsets and students building foundational knowledge an essential understanding of key investment management concepts. Designed to be an accessible resource for a wide range of learners, this volume explores the full portfolio management process. Inside, readers will find detailed coverage of: Forming capital market expectations Principles of the asset allocation process Determining investment strategies within each asset class Integrating considerations specific to high net worth individuals or institutions into chosen strategies And more To apply the concepts outlined in the Investment Management volume, explore the accompanying Portfolio Management in Practice, Volume 1: Investment Management Workbook. The perfect companion resource, this workbook aligns chapter-by-chapter with Investment Management for easy referencing so readers can draw connections between theoretical content and challenging practice problems. Featuring contributions from the CFA Institute’s subject matter experts, Portfolio Management in Practice, Volume 1: Investment Management distills the knowledge forward-thinking professionals will need to succeed in today’s fast-paced financial world.

Download or read book Portfolio Selection written by Harry Markowitz and published by Yale University Press. This book was released on 2008-10-01 with total page 369 pages. Available in PDF, EPUB and Kindle. Book excerpt: Embracing finance, economics, operations research, and computers, this book applies modern techniques of analysis and computation to find combinations of securities that best meet the needs of private or institutional investors.

Download or read book Mean Variance Portfolio Optimization Based on Ordinal Information written by Cela Eranda and published by . This book was released on 2019 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new approach that allows for incorporating qualitative views, such as ordering information, into estimates of future asset returns within the Black-Litterman model. We develop a mathematical framework and numerical computation methods for this setting. We find importance sampling to be the most appropriate numerical approach in terms of accuracy and computation time. Using empirical stock market data, we find our extended Black-Litterman model to process ordering information on future asset returns better than two previously suggested approaches. Our new estimator is successfully evaluated in the context of mean-variance portfolio optimization.

Download or read book Measuring Market Risk written by Kevin Dowd and published by John Wiley & Sons. This book was released on 2003-02-28 with total page 395 pages. Available in PDF, EPUB and Kindle. Book excerpt: The most up-to-date resource on market risk methodologies Financial professionals in both the front and back office require an understanding of market risk and how to manage it. Measuring Market Risk provides this understanding with an overview of the most recent innovations in Value at Risk (VaR) and Expected Tail Loss (ETL) estimation. This book is filled with clear and accessible explanations of complex issues that arise in risk measuring-from parametric versus nonparametric estimation to incre-mental and component risks. Measuring Market Risk also includes accompanying software written in Matlab—allowing the reader to simulate and run the examples in the book.