Mean-Variance Portfolio Optimization Based on Ordinal Information

34 Pages Posted: 25 Apr 2019 Last revised: 23 Oct 2019

See all articles by Cela Eranda

Cela Eranda

Graz University of Technology

Stephan Hafner

University of Graz

Roland Mestel

University of Graz

Ulrich Pferschy

University of Graz - Institute for Statistics and Operations Research

Date Written: March 25, 2019

Abstract

We propose a new approach that allows for incorporating qualitative views, such as ordering information, into estimates of future asset returns within the Black-Litterman model. We develop a mathematical framework and numerical computation methods for this setting. We find importance sampling to be the most appropriate numerical approach in terms of accuracy and computation time. Using empirical stock market data, we find our extended Black-Litterman model to process ordering information on future asset returns better than two previously suggested approaches. Our new estimator is successfully evaluated in the context of mean-variance portfolio optimization.

Keywords: Return Estimation, Qualitative Views, Portfolio Optimization, Black-Litterman Model

JEL Classification: C11, G11, G17

Suggested Citation

Eranda, Cela and Hafner, Stephan and Mestel, Roland and Pferschy, Ulrich, Mean-Variance Portfolio Optimization Based on Ordinal Information (March 25, 2019). Available at SSRN: https://ssrn.com/abstract=3360250 or http://dx.doi.org/10.2139/ssrn.3360250

Cela Eranda

Graz University of Technology ( email )

Kopernikusgasse 24/IV
Graz University of Technology,
GRAZ, STYRIA A-8010
Austria

Stephan Hafner

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

Roland Mestel (Contact Author)

University of Graz ( email )

Institute of Banking and Finance
Universitaetsstrasse 15/F2
A-8010 Graz
Austria
+43 316 380 7304 (Phone)
+43 316 380 9580 (Fax)

Ulrich Pferschy

University of Graz - Institute for Statistics and Operations Research ( email )

Graz
Austria

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