Robust Asset Allocation
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
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.
- Bawa, V.S., S.J. Brown, and R.W. Klein. (1979). Estimation Risk and Optimal Portfolio Choice. Amsterdam: North-Holland.
- Ben-Tal, A. and A. Nemirovski. (1999). "Robust Solutions of Uncertain Linear Programs." Operations Research Letters 25, 1–13. CrossRef
- Goldfarb, D. and G. Iyengar. (2003). "Robust Portfolio Selection Problems." Mathematics of Operations Research 28(1), 1–38. CrossRef
- Halldórsson, B.V. and R.H. Tütüncü. (2003). "An Interior-Point Method for a Class of Saddle-Point Problems." Journal of Optimization Theory and Applications 116(3), 559–590. CrossRef
- Jen, E. (2001). "Working Definitions of Robustness." SFI Robustness site, http://discuss.santafe.edu/robustness, RS-2001-009
- Lobo, M.S. and S. Boyd. (1999). "The Worst-Case Risk of a Portfolio." Informations Systems Laboratory, Stanford University.
- Markowitz, H. (1952). "Portfolio Selection." Journal of Finance 7, 77–91.
- Michaud, R.O. (1989). "The Markowitz Optimization Enigma: Is Optimized Optimal?" Financial Analysts Journal 45, 31–42. CrossRef
- Michaud, R.O. (1998). Efficient Asset Management. Boston, MA: Harvard Business School Press.
- Morgan, J. and R. Raucci. (1997). "Continuity Properties of E-Solutions for Generalized Parametric Saddle Point Problems and Application to Hierarchical Games." Journal of Mathematical Analysis and Applications 211, 30–48. CrossRef
- Nesterov, Yu. and A. Nemirovskii. (1994). Interior-Point Polynomial Algorithms in Convex Programming. Philadelphia, PA: SIAM.
- Robust Asset Allocation
Annals of Operations Research
Volume 132, Issue 1-4 , pp 157-187
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- robust optimization
- mean-variance optimization
- saddle-point problems
- Industry Sectors