Working Paper: CEPR ID: DP6161
Authors: Frank Lutgens; Peter C. Schotman
Abstract: We consider mean-variance portfolio choice of a robust investor. The investor receives advice from J experts, each with a different prior for the distribution of returns. Confronted with these multiple priors the investor follows a min-max portfolio strategy. We study the structure of the robust mean-variance portfolio and empirically compare its performance with a variety of alternative portfolio strategies. The empirical tests are based on bootstrap simulations on the 25 Fama-French portfolios and on 81 European country and value portfolios. We find that the robust portfolio performs well in both settings. Robust portfolios do not exhibit the extreme weights typically observed in naive mean-variance portfolios. Robust portfolios are also better diversified than portfolios that impose short-sell constraints to suppress the symptoms of extreme weights.
Keywords: Mean-variance; Model uncertainty; Portfolio choice
JEL Codes: C11; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| robust portfolio optimization strategies (G11) | investment performance (G11) |
| robust portfolio optimization strategies (G11) | performance under worst-case scenarios (D80) |
| robust portfolio optimization strategies (G11) | improved investment outcomes (G11) |
| robust portfolio optimization strategies (G11) | performance relative to naive mean-variance portfolios (G11) |
| diversity of expert opinions (D70) | robust portfolio's performance (G11) |
| correlation of expert opinions with true expected returns (G17) | robust portfolio's performance (G11) |
| robust decision-making framework (D91) | larger risky investments (G11) |