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Portfolio selection for individual passive investing

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  • David Puelz
  • P. Richard Hahn
  • Carlos M. Carvalho

Abstract

This paper considers passive fund selection from an individual investor's perspective. The growth of the passive fund market over the past decade is staggering. Individual investors who wish to buy these funds for their retirement and brokerage accounts have many options and are faced with a difficult selection problem. Which funds do they invest in, and in what proportions? We develop a novel statistical methodology to address this problem by adapting recent advances in posterior summarization. A Bayesian decision‐theoretic approach is presented to construct optimal sparse portfolios for individual investors over time.

Suggested Citation

  • David Puelz & P. Richard Hahn & Carlos M. Carvalho, 2020. "Portfolio selection for individual passive investing," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 36(1), pages 124-142, January.
    • Handle: RePEc:wly:apsmbi:v:36:y:2020:i:1:p:124-142
    DOI: 10.1002/asmb.2483
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    References listed on IDEAS

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    1. P. Richard Hahn & Carlos M. Carvalho, 2015. "Decoupling Shrinkage and Selection in Bayesian Linear Models: A Posterior Summary Perspective," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 110(509), pages 435-448, March.
    2. Davide Pettenuzzo & Francesco Ravazzolo, 2016. "Optimal Portfolio Choice Under Decision‐Based Model Combinations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1312-1332, November.
    3. Sankaran, Jayaram K. & Patil, Ajay A., 1999. "On the optimal selection of portfolios under limited diversification," Journal of Banking & Finance, Elsevier, vol. 23(11), pages 1655-1666, November.
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    Cited by:

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    2. Niko Hauzenberger & Michael Pfarrhofer & Luca Rossini, 2020. "Sparse time-varying parameter VECMs with an application to modeling electricity prices," Papers 2011.04577, arXiv.org, revised Apr 2023.

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