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Portfolio Optimization Under a Minimax Rule

  • Xiaoqiang Cai

    ()

    (Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

  • Kok-Lay Teo

    ()

    (Department of Applied Mathematics, The Hong Kong Polytechnic University, Kowloon, Hong Kong)

  • Xiaoqi Yang

    ()

    (Department of Applied Mathematics, The Hong Kong Polytechnic University, Kowloon, Hong Kong)

  • Xun Yu Zhou

    ()

    (Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

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    This paper provides a new portfolio selection rule. The objective is to minimize the maximum individual risk and we use an l \infty function as the risk measure. We provide an explicit analytical solution for the model and are thus able to plot the entire efficient frontier. Our selection rule is very conservative. One of the features of the solution is that it does not explicitly involve the covariance of the asset returns.

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    File URL: http://dx.doi.org/10.1287/mnsc.46.7.957.12039
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 46 (2000)
    Issue (Month): 7 (July)
    Pages: 957-972

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    Handle: RePEc:inm:ormnsc:v:46:y:2000:i:7:p:957-972
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    1. Best, Michael J. & Grauer, Robert R., 1992. "Positively Weighted Minimum-Variance Portfolios and the Structure of Asset Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 513-537, December.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    3. Martin R. Young, 1998. "A Minimax Portfolio Selection Rule with Linear Programming Solution," Management Science, INFORMS, vol. 44(5), pages 673-683, May.
    4. Best, Michael J & Grauer, Robert R, 1991. "On the Sensitivity of Mean-Variance-Efficient Portfolios to Changes in Asset Means: Some Analytical and Computational Results," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 315-42.
    5. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1851-1872, September.
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