Annals of Operations Research

, Volume 132, Issue 1, pp 157-187

Robust Asset Allocation

  • R.H. TütüncüAffiliated withDepartment of Mathematical Sciences, Carnegie Mellon University
  • , M. KoenigAffiliated withQuantitative Analysis, National City Investment Management Company

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This article addresses the problem of finding an optimal allocation of funds among different asset classes in a robust manner when the estimates of the structure of returns are unreliable. Instead of point estimates used in classical mean-variance optimization, moments of returns are described using uncertainty sets that contain all, or most, of their possible realizations. The approach presented here takes a conservative viewpoint and identifies asset mixes that have the best worst-case behavior. Techniques for generating uncertainty sets from historical data are discussed and numerical results that illustrate the stability of robust optimal asset mixes are reported.

robust optimization mean-variance optimization saddle-point problems