Robust Portfolio Optimisation with Multiple Experts

51 Pages Posted: 19 May 2008

See all articles by Frank Lutgens

Frank Lutgens

Maastricht School of Business and Economics

Peter C. Schotman

Maastricht University - Department of Finance

Date Written: March 2007

Abstract

We consider mean-variance portfolio choice of a robust investor. The investor receives advice from J experts, each with a different prior for the distribution of returns. Confronted with these multiple priors the investor follows a min-max portfolio strategy. We study the structure of the robust mean-variance portfolio and empirically compare its performance with a variety of alternative portfolio strategies. The empirical tests are based on bootstrap simulations on the 25 Fama-French portfolios and on 81 European country and value portfolios. We find that the robust portfolio performs well in both settings. Robust portfolios do not exhibit the extreme weights typically observed in naive mean-variance portfolios. Robust portfolios are also better diversified than portfolios that impose short-sell constraints to suppress the symptoms of extreme weights.

Keywords: Mean-variance, model uncertainty, portfolio choice

JEL Classification: C11, D80

Suggested Citation

Lutgens, Frank and Schotman, Peter C., Robust Portfolio Optimisation with Multiple Experts (March 2007). CEPR Discussion Paper No. DP6161, Available at SSRN: https://ssrn.com/abstract=1133805

Frank Lutgens (Contact Author)

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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