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Sparse Mean-Variance Portfolios: A Penalized Utility Approach

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

Abstract

This paper considers mean-variance optimization under uncertainty, specifically when one desires a sparsified set of optimal portfolio weights. From the standpoint of a Bayesian investor, our approach produces a small portfolio from many potential assets while acknowledging uncertainty in asset returns and parameter estimates. We demonstrate the procedure using static and dynamic models for asset returns.

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  • David Puelz & P. Richard Hahn & Carlos M. Carvalho, 2015. "Sparse Mean-Variance Portfolios: A Penalized Utility Approach," Papers 1512.02310, arXiv.org, revised Oct 2016.
    • Handle: RePEc:arx:papers:1512.02310
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    File URL: http://arxiv.org/pdf/1512.02310
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    Cited by:

    1. Felix Abramovich & Vadim Grinshtein, 2013. "Estimation of a sparse group of sparse vectors," Biometrika, Biometrika Trust, vol. 100(2), pages 355-370.

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