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Mean-variance optimization and the cross-section of stock returns

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  • Lalwani, Vaibhav

Abstract

Currently, popular asset pricing factors utilize ad hoc weighting procedures. By synthesizing mean-variance theory with multi-factor pricing, we generate an asset-pricing factor using optimal portfolio weights that maximize the Sharpe ratio. Our factor works out-of-sample and can be utilized by a real-time investor. We show that the optimal factor is priced in the cross-section of stock returns even after controlling for nine other popular factors in the literature. The optimal factor is priced in international stock markets and can also explain the cross-section of bond returns.

Suggested Citation

  • Lalwani, Vaibhav, 2025. "Mean-variance optimization and the cross-section of stock returns," Global Finance Journal, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:glofin:v:66:y:2025:i:c:s1044028325000572
    DOI: 10.1016/j.gfj.2025.101130
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    More about this item

    Keywords

    Mean-variance optimization; Out-of-sample; Optimal factor; Asset-pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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