Mean-variance portfolio management with functional optimization

DOI10.1142/S0219024920500557MaRDI QIDQ5854327zbMATH OpenOpenAlexFDO

Authors Ka Wai Tsang, Zhaoyi He

Publication date 16 March 2021

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2005.12774

zbMATH Keywords

functional optimizationportfolio managementresamplingSharpe ratiotime-series

Mathematics Subject Classification ID

Portfolio theory (91G10)

Abstract: This paper introduces a new functional optimization approach to portfolio optimization problems by treating the unknown weight vector as a function of past values instead of treating them as fixed unknown coefficients in the majority of studies. We first show that the optimal solution, in general, is not a constant function. We give the optimal conditions for a vector function to be the solution, and hence give the conditions for a plug-in solution (replacing the unknown mean and variance by certain estimates based on past values) to be optimal. After showing that the plug-in solutions are sub-optimal in general, we propose gradient-ascent algorithms to solve the functional optimization for mean-variance portfolio management with theorems for convergence provided. Simulations and empirical studies show that our approach can perform significantly better than the plug-in approach.

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Cites work

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Cited in

(3)

• Portfolio optimization by a bivariate functional of the mean and variance
• Functional portfolio optimization in stochastic portfolio theory
• Integrating prediction in mean-variance portfolio optimization

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