A Linear Risk-Return Model for Enhanced Indexation

19 Pages Posted: 14 Nov 2013

See all articles by Renato Bruni

Renato Bruni

Sapienza University of Rome

Francesco Cesarone

University of Rome III - Department of Business Studies

Andrea Scozzari

University of Rome Niccolo' Cusano

Fabio Tardella

Faculty of Economics - Sapienza University of Rome

Date Written: November 14, 2013

Abstract

Enhanced Indexation is the problem of selecting a portfolio that should produce excess return with respect to a given benchmark index. In this work we propose a linear bi-objective optimization approach to Enhanced Indexation that maximizes average excess return and minimizes underperformance over a learning period. Our model can be efficiently solved to optimality by means of standard Linear Programming techniques. On the theoretical side, we investigate conditions that guarantee or forbid the existence of a portfolio strictly outperforming the index. We also support our model with extensive empirical analysis on publicly available real-world financial datasets, including comparison with previous studies, performance and diversification analysis, and verification of some of the proposed theoretical results on real data.

Keywords: Portfolio Optimization, Linear Programming, Index Tracking, Performance Analysis

JEL Classification: C6, G1

Suggested Citation

Bruni, Renato and Cesarone, Francesco and Scozzari, Andrea and Tardella, Fabio, A Linear Risk-Return Model for Enhanced Indexation (November 14, 2013). Available at SSRN: https://ssrn.com/abstract=2354321 or http://dx.doi.org/10.2139/ssrn.2354321

Renato Bruni

Sapienza University of Rome ( email )

Rome
Italy

Francesco Cesarone (Contact Author)

University of Rome III - Department of Business Studies ( email )

Via Silvio D'Amico 77
Rome, Rome 00145
Italy

HOME PAGE: http://www.francescocesarone.com/

Andrea Scozzari

University of Rome Niccolo' Cusano ( email )

Via Don Carlo Gnocchi, 3
Roma, 00166
Italy

Fabio Tardella

Faculty of Economics - Sapienza University of Rome ( email )

Via del Castro Laurenziano, 9
Roma, Rome 00161
Italy

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