An Averaging Framework for Minimum-Variance Portfolios: Optimal Rules for Combining Portfolio Weights

66 Pages Posted: 2 Feb 2024 Last revised: 13 Apr 2024

See all articles by Roland Füss

Roland Füss

Swiss Finance Institute; University of St. Gallen - School of Finance

Thorsten Glück

Wiesbaden Business School

Christian Koeppel

University of St. Gallen

Felix Miebs

University of Applied Sciences Cologne

Date Written: January 31, 2024

Abstract

We propose an averaging framework for combining minimum-variance strategies to either minimize the expected out-of-sample variance or maximize the expected out-of-sample Sharpe ratio. Our framework overcomes the problem of selecting the “best” strategy ex-ante by optimally averaging over portfolio weights. This averaging procedure has an intuitive economic interpretation because it resembles a fund-of-fund approach, where each minimum-variance strategy represents a single fund. In a range of simulations, for a set of well-established strategies, we show that optimally averaging over portfolio weights improves the out-of-sample variance and Sharpe ratio. We confirm the finding of our simulation study on empirical data.

Keywords: Averaging; diversification; estimation error; portfolio optimization; shrinkage.

JEL Classification: G11

Suggested Citation

Füss, Roland and Glück, Thorsten and Koeppel, Christian and Miebs, Felix, An Averaging Framework for Minimum-Variance Portfolios: Optimal Rules for Combining Portfolio Weights (January 31, 2024). Swiss Finance Institute Research Paper No. 24-10, Available at SSRN: https://ssrn.com/abstract=4714463 or http://dx.doi.org/10.2139/ssrn.4714463

Roland Füss (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Thorsten Glück

Wiesbaden Business School ( email )

Bleichstraße 44
Wiesbaden, 65189
Germany

Christian Koeppel

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Felix Miebs

University of Applied Sciences Cologne ( email )

Claudiusstrasse 1
Cologne, 50678
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
102
Abstract Views
373
Rank
482,650
PlumX Metrics