On portfolio choice by maximising the outperformance probability
نویسنده
چکیده
We consider the problem of optimal portfolio selection for a multidimensional geometric Brownian motion model. We look for portfolios that maximise the probability of outperforming a stochastic benchmark. More specifically, we seek to maximise the decay rate of the shortfall probability and (or) to minimise the decay rate of the outperformance probability in the long run. A simple heuristic enables us to find an asymptotically optimal investment policy. The results provide interesting insights.
منابع مشابه
Outperformance Testing of a Dynamic Assets Portfolio Selection Supplemented with a Continuous Paths Levy Process
This study aims at getting a better performance for optimal stock portfolios by modeling stocks prices dynamics through a continuous paths Levy process. To this end, the share prices are simulated using a multi-dimensional geometric Brownian motion model. Then, we use the results to form the optimal portfolio by maximizing the Sharpe ratio and comparing the findings with the outputs of the conv...
متن کاملBalancing growth and shortfall probability in continuous time active portfolio management
Active portfolio management is concerned with objectives related to the outperformance of the return of a target benchmark portfolio. Here we consider an objective that relates the probability of achieving a given performance objective to the time it takes to achieve the objective, in this way balancing risk and return. As a special case, our analysis includes the case where the investor wants ...
متن کاملRisk-Constrained Dynamic Active Portfolio Management
A portfolio management is concerned with objectives related to the outperformance of the return of a target benchmark portfolio. In this paper, we consider a dynamic active portfolio management problem where the objective is related to the tradeoff between the achievement of performance goals and the risk of a shortfall. Specifically, we consider an objective that relates the probability of ach...
متن کاملPortfolio Choice and Estimation Risk. a Comparison of Bayesian to Heuristic Approaches* By
Estimation risk is known to have a huge impact on mean/variance optimized portfolios, which is one of the primary reasons to make standard Markowitz optimization unfeasible in practice. This issue has attracted new interest in the last years, and several approaches to incorporate estimation risk into portfolio selection have been developed only recently. In this article, we review these approac...
متن کاملWhy optimal diversification cannot outperform naive diversification: Evidence from tail risk exposure
Version of January 2013 Abstract This paper examines the outperformance of naive diversification relative to optimal diversification. From out-of-sample analysis using portfolios consisting of individual stocks as well as diversified equity portfolios, we find that optimal diversification fails to consistently outperform naive diversification. Our results show that naive diversification increas...
متن کامل