Strategies for choosing an uncertainty budget in log-robust portfolio management
Department or Administrative Unit
Finance and Supply Chain Management
This paper proposes six strategies for deciding upon “budget of uncertainty” parameters as input to a sequence of robust (portfolio) optimization problems over time, the solutions of which are a sequence of portfolios (i.e., a portfolio trajectory). Using 10 French Library datasets,1 the performance of the portfolio trajectories resulting from these strategies are compared with one another and the 1/n strategy. Before accounting for trading costs, all strategies result in portfolio trajectories that produce higher profit than the 1/n strategy. Even after accounting for trading costs (of 1% of trading volume), two of the strategies result in portfolio trajectories that have higher profit and lower risk compared to the 1/n strategy. Furthermore, we find that equal-weighted indices are better assets to manage than value-weighted indices in terms of achieving larger returns and lower risks.
Pae, Y., & Sabbaghi, N. (2019). Strategies for choosing an uncertainty budget in log-robust portfolio management. International Journal of Financial Engineering, 6(2), 1950011. https://doi.org/10.1142/s2424786319500117
International Journal of Financial Engineering