Article ID: | iaor20051243 |
Country: | Netherlands |
Volume: | 132 |
Issue: | 1 |
Start Page Number: | 157 |
End Page Number: | 187 |
Publication Date: | Nov 2004 |
Journal: | Annals of Operations Research |
Authors: | Ttnc R.H., Koenig M. |
Keywords: | portfolio management |
This article addresses the problem of finding an optimal allocation of funds among different asset classes in a robust manner when the estimates of the structure of returns are unreliable. Instead of point estimates used in classical mean-variance optimization, moments of returns are described using uncertainty sets that contain all, or most, of their possible realizations. The approach presented here takes a conservative viewpoint and identifies asset mixes that have the best worst-case behavior. Techniques for generating uncertainty sets from historical data are discussed and numerical results that illustrate the stability of robust optimal asset mixes are reported.