, Volume 132, Issue 1-4, pp 157-187

Robust Asset Allocation

Rent the article at a discount

Rent now

* Final gross prices may vary according to local VAT.

Get Access

Abstract

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.