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A risk-gain dominance maximization approach to enhanced index tracking

Author

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  • Cesarone, Francesco
  • Lampariello, Lorenzo
  • Sagratella, Simone

Abstract

Following the research strands of enhanced index tracking and of portfolio performance measures optimization, we propose to choose, among the feasible asset portfolios of a given market, the one that maximizes the geometric mean of the differences between its risk and gain and those of a suitable reference benchmark, such as the market index. This approach, which has a peculiar geometric interpretation and enjoys remarkable features, provides the efficient portfolio that dominates the largest amount of portfolios dominating the reference benchmark index. Preliminary empirical results highlight good out-of-sample performances of our approach compared with those of the market index.

Suggested Citation

  • Cesarone, Francesco & Lampariello, Lorenzo & Sagratella, Simone, 2019. "A risk-gain dominance maximization approach to enhanced index tracking," Finance Research Letters, Elsevier, vol. 29(C), pages 231-238.
  • Handle: RePEc:eee:finlet:v:29:y:2019:i:c:p:231-238
    DOI: 10.1016/j.frl.2018.08.001
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    References listed on IDEAS

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    6. Alessandra Carleo & Francesco Cesarone & Andrea Gheno & Jacopo Maria Ricci, 2017. "Approximating exact expected utility via portfolio efficient frontiers," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 40(1), pages 115-143, November.
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    More about this item

    Keywords

    Asset allocation; Portfolio performance measures optimization; Enhanced indexation; Nonlinear programming;

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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