Minimax: Portfolio Choice Based on Pessimistic Decision Making

25 Pages Posted: 6 Jun 2012

See all articles by Steffen Schaarschmidt

Steffen Schaarschmidt

University of Konstanz - Department of Economics

Peter Schanbacher

University of Konstanz - Faculty of Economics and Statistics

Date Written: May 24, 2012

Abstract

We propose a fund allocation strategy for a highly risk-averse investor based on pessimistic decision making to construct portfolios of four major asset classes. Using US data (indexes of stocks, bonds, real estate, and commodities) from January 1990 to December 2010, we find that the proposed Minimax strategy performs well out-of-sample with respect to standard risk measures. Its performance is better than common alternative trading strategies such as fixed weights, minimum variance, or mean-variance methods. Portfolio weights are stable across time, resulting in lower turnover than any mean-variance related strategy. Finally, we find that optimal portfolios are widely diversified across all asset classes. This study suggests that the proposed Minimax strategy is implementable in portfolio management, especially for large institutional investors.

Keywords: Minimax, maximin, portfolio selection, portfolio management, portfolio choice

JEL Classification: C58, G11

Suggested Citation

Schaarschmidt, Steffen and Schanbacher, Peter, Minimax: Portfolio Choice Based on Pessimistic Decision Making (May 24, 2012). Available at SSRN: https://ssrn.com/abstract=2078861 or http://dx.doi.org/10.2139/ssrn.2078861

Steffen Schaarschmidt (Contact Author)

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

Peter Schanbacher

University of Konstanz - Faculty of Economics and Statistics ( email )

Universitaetsstr. 10
78457 Konstanz
Germany

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