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https://ssrn.com/abstract=1576567
 
 

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Alternative Objective Functions for Quasi-Shrinkage Portfolio Optimization


Andre Guettler


University of Ulm - Department of Mathematics and Economics; Halle Institute for Economic Research

Fabian Trübenbach


EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting

February 7, 2011

European Business School Research Paper No. 10-07

Abstract:     
In this paper we propose a quasi-shrinkage approach for minimum-variance portfolios which does not use a quadratic loss function to derive the optimal shrinkage intensity. We develop two alternative objective functions for linear shrinkage. The first targets the reduction of portfolio variance. The second incorporates returns of assets to improve portfolio performance with respect to mean and variance. We compare the out-of-sample performance of our proposed portfolios to nine benchmark strategies across seven data sets. Our strategies often have lower portfolio variance and higher Sharpe ratios than the benchmark strategies. In particular, we beat the naïve portfolio empirically on all seven and significantly on three data sets.

Number of Pages in PDF File: 33

Keywords: Covariance Estimation, Eigenvalues, Parameter Uncertainty, Portfolio Choice, Shrinkage

JEL Classification: G11, G12, C13


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Date posted: March 24, 2010 ; Last revised: February 7, 2011

Suggested Citation

Guettler, Andre and Trübenbach, Fabian, Alternative Objective Functions for Quasi-Shrinkage Portfolio Optimization (February 7, 2011). European Business School Research Paper No. 10-07. Available at SSRN: https://ssrn.com/abstract=1576567 or http://dx.doi.org/10.2139/ssrn.1576567

Contact Information

Andre Guettler (Contact Author)
University of Ulm - Department of Mathematics and Economics ( email )
Helmholzstrasse
Ulm, D-89081
Germany
Halle Institute for Economic Research ( email )
P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany
Fabian Trübenbach
EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting ( email )
Oestrich-Winkel, 65375
Germany

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