Sparse Mean-Variance Portfolios: A Penalized Utility Approach
24 Pages Posted: 10 Feb 2016 Last revised: 27 Dec 2016
Date Written: February 8, 2016
This paper considers mean-variance optimization under uncertainty, specifically when one desires a sparsified set of optimal portfolio weights. From the standpoint of a Bayesian investor, our approach produces a small portfolio from many potential assets while acknowledging uncertainty in asset returns and parameter estimates. We demonstrate the procedure using static and dynamic models for asset returns.
Keywords: portfolio optimization, passive investing, mean-variance optimization, decoupling shrinkage and selection
JEL Classification: C11, C61
Suggested Citation: Suggested Citation