Optimal Portfolio Choice with Estimation Risk: No Risk-free Asset Case

48 Pages Posted: 10 Feb 2016 Last revised: 6 Jan 2021

See all articles by Raymond Kan

Raymond Kan

University of Toronto - Rotman School of Management

Xiaolu Wang

Iowa State University

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: November 30, 2020

Abstract

We propose an optimal combining strategy to mitigate estimation risk for the popular mean-variance portfolio choice problem in the case without a risk-free asset. We find that our strategy performs well in general, and it can be applied to known estimated rules and the resulting new rules outperform the original ones. We further obtain the exact distribution of the out-of-sample returns
and explicit expressions of the expected out-of-sample utilities of the combining strategy, providing not only a fast and accurate way of evaluating the performance but also analytical insights into the portfolio construction.

Keywords: portfolio choice, estimation risk, mean-variance optimization, optimal combining

JEL Classification: G11, G12, C11

Suggested Citation

Kan, Raymond and Wang, Xiaolu and Zhou, Guofu, Optimal Portfolio Choice with Estimation Risk: No Risk-free Asset Case (November 30, 2020). 29th Australasian Finance and Banking Conference 2016, Rotman School of Management Working Paper No. 2819254, Available at SSRN: https://ssrn.com/abstract=2819254 or http://dx.doi.org/10.2139/ssrn.2819254

Raymond Kan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S3E6
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Xiaolu Wang (Contact Author)

Iowa State University ( email )

2167 Union Drive
Ames, IA 50011
United States

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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