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Title: Global minimum variance portfolios under uncertainty: a robust optimization approach
Authors: Caçador, Sandra
Dias, Joana Matos 
Godinho, Pedro Manuel Cortesão 
Keywords: Portfolio selection, multi-objective, robust optimization, relative robustness, absolute robustness, global minimum variance portfolio
Issue Date: 3-Feb-2020
Volume: 76
Abstract: This paper presents new models which seek to optimize the first and second moments of asset returns without estimating expected returns. Motivated by the stability of optimal solutions computed by optimizing only the second moment and applying the robust optimization methodology which allows to incorporate the uncertainty in the optimization model itself, we extend and combine existing methodologies in order to define a method for computing relative-robust and absolute-robust minimum variance portfolios. For the relative robust strategy, where the maximum regret is minimized, regret is defined as the increase in the investment risk resulting from investing in a given portfolio instead of choosing the optimal portfolio of the realized scenario. The absolute robust strategy which minimizes the maximum risk was applied assuming the worst-case scenario over the whole uncertainty set. Across alternate time windows, results provide new evidence that the proposed robust minimum variance portfolios outperform non-robust portfolios. Whether portfolio measurement is based on return, risk, regret or modified Sharpe ratio, results suggest that the robust methodologies are able to optimize the first and second moments without the need to estimate expected returns.
DOI: 10.1007/s10898-019-00859-x
Rights: embargoedAccess
Appears in Collections:I&D CeBER - Artigos em Revistas Internacionais

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