Optimal Portfolio Choice with Estimation Risk: No Risk-free Asset Case
48 Pages Posted: 10 Feb 2016 Last revised: 6 Jan 2021
Date Written: November 30, 2020
Abstract
We propose an optimal combining strategy to mitigate estimation risk for the popular mean-variance portfolio choice problem in the case without a risk-free asset. We find that our strategy performs well in general, and it can be applied to known estimated rules and the resulting new rules outperform the original ones. We further obtain the exact distribution of the out-of-sample returns
and explicit expressions of the expected out-of-sample utilities of the combining strategy, providing not only a fast and accurate way of evaluating the performance but also analytical insights into the portfolio construction.
Keywords: portfolio choice, estimation risk, mean-variance optimization, optimal combining
JEL Classification: G11, G12, C11
Suggested Citation: Suggested Citation