Optimal portfolio choice: A minimum expected loss approach

The mainstream in finance tackles portfolio selection based on a plug-in approach without consideration of the main objective of the inferential situation. We propose minimum expected loss (MELO) estimators for portfolio selection that explicitly consider the trading rule of interest. The asymptotic properties of our MELO proposal are similar to the plug-in approach. Nevertheless, simulation exercises show that our proposal exhibits better finite sample properties when compared to the competing alternatives, especially when the tangency portfolio is taken as the asset allocation strategy. We have also developed a graphical user interface to help practitioners to use our MELO proposal.