An Empirical Assessment of Characteristics and Optimal Portfolios

76 Pages Posted: 12 Apr 2018 Last revised: 13 Apr 2024

See all articles by Christopher G. Lamoureux

Christopher G. Lamoureux

University of Arizona

Huacheng Zhang

University of Edinburgh Business School

Date Written: January 26, 2018

Abstract

We implement a dynamically regularized, bootstrapped two-stage out-of-sample parametric portfolio policy to evaluate characteristics’ efficacy in the conditional stock return generating process in the metric of expected power utility. Traditional characteristics, such as momentum and size afforded large utility gains before 1999. These opportunities have since vanished. Overfitting– imprecision in weight estimation–is correlated with the optimal portfolio’s variance. Therefore, it is not a problem for power utility investors with coefficients of relative aversion greater than four. For more risk-tolerant investors, we successfully reduce estimation error by increasing the curvature of the loss function relative to the investor’s utility function.

Keywords: cross-section of stock returns; stock characteristics; optimal portfolios

JEL Classification: G10, G11

Suggested Citation

Lamoureux, Christopher G. and Zhang, Huacheng, An Empirical Assessment of Characteristics and Optimal Portfolios (January 26, 2018). Available at SSRN: https://ssrn.com/abstract=3018499 or http://dx.doi.org/10.2139/ssrn.3018499

Christopher G. Lamoureux (Contact Author)

University of Arizona ( email )

Tucson, AZ 85721
United States
520-621-7488 (Phone)
520-621-1261 (Fax)

Huacheng Zhang

University of Edinburgh Business School ( email )

EH8 9JS (Fax)

HOME PAGE: http://https://www.business-school.ed.ac.uk/

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