33 Pages Posted: 24 Mar 2010 Last revised: 7 Feb 2011
Date Written: February 7, 2011
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.
Keywords: Covariance Estimation, Eigenvalues, Parameter Uncertainty, Portfolio Choice, Shrinkage
JEL Classification: G11, G12, C13
Suggested Citation: 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