Robust Portfolio Optimization with Multiple Experts

55 Pages Posted: 12 Jul 2008 Last revised: 6 Nov 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: July 12, 2008

Abstract

We consider mean-variance portfolio choice of a robust investor. The investor receives advice from J experts, each with a different prior for expected returns and risk. Given this advice the investor follows a min-max portfolio strategy. We study the structure of the robust mean-variance portfolio and compare its performance with a variety of alternative portfolio strategies. We find that the robust investor combines the estimates from the different experts. When experts agree on the main factors that generate returns, the robust investor relies on the advice of the expert with the strongest prior. Dispersed advice leads the investor to combine alternative estimates. The investor is likely to outperfrom alternative strategies. The theoretical analysis is supported by numerical simulations for the 25 Fama-French portfolios and for 81 European country and value portfolios.

Suggested Citation

Lutgens, Frank and Schotman, Peter C., Robust Portfolio Optimization with Multiple Experts (July 12, 2008). Available at SSRN: https://ssrn.com/abstract=1158846 or http://dx.doi.org/10.2139/ssrn.1158846

Frank Lutgens

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Peter C. Schotman (Contact Author)

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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