Search results for "Replicating portfolio"
showing 10 items of 16 documents
Superiority of Optimized Portfolios to Naive Diversification: Fact or Fiction?
2017
Abstract DeMiguel, Garlappi, and Uppal (2009) conducted a highly influential study where they demonstrated that none of the optimized portfolios consistently outperformed the naive diversification. This result triggered a heated debate within the academic community on whether portfolio optimization adds value. Nowadays several studies claim to defend the value of portfolio optimization. The commonality in all these studies is that various portfolio optimization methods are implemented using the datasets generously provided by Kenneth French and the performance is measured by means of the Sharpe ratio. This paper aims to provide a cautionary note regarding the use of Kenneth French datasets …
Optimal Dynamic Portfolio Risk Management
2016
Numerous econometric studies report that financial asset volatilities and correlations are time-varying and predictable. Over the past decade, this knowledge has stimulated increasing interest in various dynamic portfolio risk control techniques. The two basic types of risk control techniques are: risk control across assets and risk control over time. At present, the two types of risk control techniques are not implemented simultaneously. There has been surprisingly little theoretical study of optimal dynamic portfolio risk management. In this paper, the author fills this gap in the literature by formulating and solving the multi-period portfolio choice problem. In terms of dynamic portfoli…
A fuzzy ranking strategy for portfolio selection applied to the Spanish stock market
2007
In this paper we present a fuzzy ranking procedure for the portfolio selection problem. The uncertainty on the returns of each portfolio is approximated by means of a trapezoidal fuzzy number. The expected return and risk of the portfolio are then characteristics of that fuzzy number. A rank index that accounts for both expected return and risk is defined, allowing the decision-maker to compare different portfolios. The paper ends with an application of that fuzzy ranking strategy to the Spanish stock market.
Scenario optimization asset and liability modelling for individual investors
2006
We develop a scenario optimization model for asset and liability management of individual investors. The individual has a given level of initial wealth and a target goal to be reached within some time horizon. The individual must determine an asset allocation strategy so that the portfolio growth rate will be sufficient to reach the target. A scenario optimization model is formulated which maximizes the upside potential of the portfolio, with limits on the downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochastic behavior of asset returns is captured through bootstrap simulation, and the simulation is embedded in the model to determine the optimal portfolio. …
A Simulation Analysis of the Microstructure of an Order Driven Financial Market with Multiple Securities and Portfolio Choices
2005
In this paper we propose an artificial market where multiple risky assets are exchanged. Agents are constrained by the availability of resources and trade to adjust their portfolio according to an exogenously given target portfolio. We model the trading mechanism as a continuous auction order-driven market. Agents are heterogeneous in terms of desired target portfolio allocations, but they are homogeneous in terms of trading strategies. We investigate the role played by the trading mechanism in affecting the dynamics of prices, trading volume and volatility. We show that the institutional setting of a double auction market is sufficient to generate a non-normal distribution of price changes…
How does learning affect market liquidity? A simulation analysis of a double-auction financial market with portfolio traders
2007
We study the relationship between liquidity and prices in an artificial financial market where portfolio traders with limited resources interact through a continuous, electronic open book. We depart from the standard asset pricing framework in two ways. First, we assume that investors have incomplete information about the distribution of returns. Second, we model the portfolio choice problem using prospect-type preferences. We model the utility function in terms of deviations of the portfolio growth rate from a specified target growth rate, and we assume that investors are more sensitive to downside movements. We show that the parameters defining the learning process affect the price dynami…
Fuzzy portfolio optimization under downside risk measures
2007
This paper presents two fuzzy portfolio selection models where the objective is to minimize the downside risk constrained by a given expected return. We assume that the rates of returns on securities are approximated as LR-fuzzy numbers of the same shape, and that the expected return and risk are evaluated by interval-valued means. We establish the relationship between those mean-interval definitions for a given fuzzy portfolio by using suitable ordering relations. Finally, we formulate the portfolio selection problem as a linear program when the returns on the assets are of trapezoidal form.
Learning and the Price Dynamics of a Double-Auction Financial Market with Portfolio Traders
2006
In this paper we study the dynamics of price adjustments in an artificial market where portfolio traders with bounded rationality and limited resources interact through a continuous, electronic open book. The present work extends the model developed in [? ] introducing endogenous target individual portfolio holdings. We model the agents’ order-flow investment decision as an optimal choice given individual characteristics and the available information. We depart from the standard asset pricing framework in two ways. First, we assume that investors have imperfect information about the returns distribution. In particular, we assume that agents hold arbitrary priors about securities’ returns, w…
Portfolios with fuzzy returns: Selection strategies based on semi-infinite programming
2008
AbstractThis paper provides new models for portfolio selection in which the returns on securities are considered fuzzy numbers rather than random variables. The investor's problem is to find the portfolio that minimizes the risk of achieving a return that is not less than the return of a riskless asset. The corresponding optimal portfolio is derived using semi-infinite programming in a soft framework. The return on each asset and their membership functions are described using historical data. The investment risk is approximated by mean intervals which evaluate the downside risk for a given fuzzy portfolio. This approach is illustrated with a numerical example.
Continuous-time portfolio optimization under terminal wealth constraints
1995
Typically portfolio analysis is based on the expected utility or the mean-variance approach. Although the expected utility approach is the more general one, practitioners still appreciate the mean-variance approach. We give a common framework including both types of selection criteria as special cases by considering portfolio problems with terminal wealth constraints. Moreover, we propose a solution method for such constrained problems.