Optimal portfolio choice: a minimum expected loss approach (Q2299386)

The authors follow a decision theory framework based on a Bayesian approach, the minimum expected loss approach (MELO), where the posterior expected value of a generalized quadratic loss function, which depends explicitly on the optimal assets weights (the main estimation goal), is minimized. They analyze the global minimum variance portfolio, tangency portfolio, and Treynor-Black portfolio. The approach is based on minimizing the posterior expected loss function rather than the frequentest risk function, and the loss function is based on the trading strategy rather than the utility function. In particular, the authors exploit the specific structure (rational functions) of the main objective of estimation in three well known portfolio optimization problems, and propose the MELO approach obtaining same asymptotic results as the plug-in approach, but showing that their proposal obtains better statistical properties in finite samples when compared to the competing alternatives, especially when the optimal trading rule is the tangency portfolio. If to analyze the content of the paper sequentially, theoretical framework of different competing alternatives is presented, then the MELO estimates are obtained for global minimum variance, tangency portfolio and Treynor-Black model, then the outcomes of the simulation exercises are exhibited and finally, an empirical study is developed.