estimation error

Portfolio optimization in the presence of estimation errors on the expected asset returns

  • Gérard Cornuéjols
  • Ozgun Elci
  • Matthias Köppe
    • Categories Finance and Economics, Robust Optimization Tags , , ,

    It is well known that the classical Markowitz model for portfolio optimization is extremely sensitive to estimation errors on the expected asset returns. Robust optimization mitigates this issue. We focus on ellipsoidal uncertainty sets around the point estimates of the expected asset returns. We investigate the performance of diagonal estimation-error matrices in the description of … Read more

    Portfolio Selection with Robust Estimation

  • Victor DeMiguel
  • Francisco Javier Nogales
    • Categories Finance and Economics, Robust Optimization Tags , , ,

    Mean-variance portfolios constructed using the sample mean and covariance matrix of asset returns perform poorly out-of-sample due to estimation error. Moreover, it is commonly accepted that estimation error in the sample mean is much larger than in the sample covariance matrix. For this reason, practitioners and researchers have recently focused on the minimum-variance portfolio, which … Read more