Improving the Naive Portfolio Strategy

26 Pages Posted: 23 Aug 2016 Last revised: 11 Jan 2017

Date Written: August 21, 2016

Abstract

In this paper, I consider four approaches to improve the naive strategy, of which one is newly proposed in this paper. The new approach attempts to minimize the difference from a reference portfolio while satisfying risk and return targets. Other well known strategies such as variance minimization are also compared. Empirical results show that the new approach consistently outperforms the naive strategy. However, the best performance comes from the minimum variance portfolios. It is also worth noting that optimal strategies appear to perform well for factor portfolios, which implies careful construction of asset universe could have a large impact on portfolio optimization performance.

Keywords: Naive Strategy; Portfolio Optimization; Turnover Minimization

Suggested Citation

Han, Chulwoo, Improving the Naive Portfolio Strategy (August 21, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2827395 or http://dx.doi.org/10.2139/ssrn.2827395

Chulwoo Han (Contact Author)

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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