Optimal portfolio choice: A minimum expected loss approach

Andrés Ramírez-Hassan, Rosember Guerra Urzola*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
Original languageEnglish
JournalMathematics and Financial Economics
DOIs
Publication statusE-pub ahead of print - 2020

Fingerprint

Expected loss
Optimal portfolio choice
Portfolio selection
Finance
Trading rules
Asset allocation
Asymptotic properties
Finite sample properties
Simulation
Exercise
Estimator
Graphical user interface

Cite this

@article{ed372a95a1444a6b9501f37f2688efa6,
title = "Optimal portfolio choice: A minimum expected loss approach",
abstract = "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.",
author = "Andr{\'e}s Ram{\'i}rez-Hassan and {Guerra Urzola}, Rosember",
year = "2020",
doi = "10.1007/s11579-019-00246-w",
language = "English",
journal = "Mathematics and Financial Economics",
issn = "1862-9679",

}

Optimal portfolio choice : A minimum expected loss approach. / Ramírez-Hassan, Andrés ; Guerra Urzola, Rosember.

In: Mathematics and Financial Economics, 2020.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Optimal portfolio choice

T2 - A minimum expected loss approach

AU - Ramírez-Hassan, Andrés

AU - Guerra Urzola, Rosember

PY - 2020

Y1 - 2020

N2 - 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.

AB - 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.

U2 - 10.1007/s11579-019-00246-w

DO - 10.1007/s11579-019-00246-w

M3 - Article

JO - Mathematics and Financial Economics

JF - Mathematics and Financial Economics

SN - 1862-9679

ER -