Chair: Victor DeMiguel, London Business School, United Kingdom
Efficient Cardinality/Mean-Variance Portfolios
Rui Pedro Brito (firstname.lastname@example.org), Luís Nunes Vicente (email@example.com)
We propose a novel approach to handle cardinality in portfolio selection, by means of a biobjective cardinality/mean-variance problem, allowing the investor to analyze the efficient tradeoff between return-risk and number of active positions. Recent progress in multiobjective optimization without derivatives allow us to robustly compute (in-sample) the whole cardinality/mean-variance efficient frontier, for a variety of data sets and mean-variance models. Our results show that a significant number of efficient cardinality/mean-variance portfolios can overcome (out-of-sample) the naive strategy, while keeping transaction costs relatively low.
Keywords: Portfolio selection, cardinality, derivative-free optimization
Multiperiod Portfolio Optimization with Many Risky Assets and General Transaction Costs
Victor DeMiguel (firstname.lastname@example.org), Xiaoling Mei (email@example.com), Francisco J. Nogales (FcoJavier.Nogales@est-econ.uc3m.es)
We analyze the optimal portfolio policy for a multiperiod mean-variance investor facing a large number of risky assets in the presence of general transaction cost. For proportional transaction costs, we give a closed-form expression for a no-trade region, shaped as a multi-dimensional parallelogram, and show how the optimal portfolio policy can be efficiently computed by solving a single quadratic program. For market impact costs, we show that at each period it is optimal to trade to the boundary of a state-dependent rebalancing region. Finally, we show empirically that the utility loss associated with ignoring transaction costs may be large.
Keywords: Portfolio optimization, No-trade region, Market impact
Beyond the Carry Trade: Optimal Currency Portfolios
Pedro Barroso (firstname.lastname@example.org)
We test the relevance of technical and fundamental variables in forming currency portfolios. Carry, momentum and value reversal all contribute to portfolio performance, whereas the real exchange rate and the current account do not. The resulting optimal portfolio produces out-of-sample returns that are not explained by risk and are valuable to diversified investors holding stocks and bonds. Exposure to currencies increases the Sharpe ratio of diversified portfolios by 0.5 on average, while reducing crash risk. We argue that besides risk, currency returns reflect the scarcity of speculative capital.
Keywords: Carry trade, Portfolio optimization, Anomalies