Robust asset allocation

Robust asset allocation

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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: ,
Keywords: portfolio management
Abstract:

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.

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