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Portfolio selection revisited

Author

Listed:
  • Alex Shkolnik

    (University of California)

  • Alec Kercheval

    (Florida State University)

  • Hubeyb Gurdogan

    (University of California)

  • Lisa R. Goldberg

    (University of California
    BlackRock, Inc.)

  • Haim Bar

    (University of Connecticut)

Abstract

In 1952, Harry Markowitz formulated portfolio selection as a trade-off between expected, or mean, return and variance. This launched a massive research effort devoted to finding suitable inputs to mean-variance optimization. The estimation problem is high dimensional and a factor model is at the core of many attempts. A factor model can reduce the number of parameters that need to be estimated to a manageable size, but these parameters may incorporate substantial, hidden estimation error. Recent analysis elucidates the nature of this error, identifies a mechanism by which it can corrupt optimization and provides a method for its mitigation. We explore this analysis here by illustrating how to improve the volatility ratio of large optimized portfolios, leading to superior portfolio selection. $$^{*}$$ ∗

Suggested Citation

  • Alex Shkolnik & Alec Kercheval & Hubeyb Gurdogan & Lisa R. Goldberg & Haim Bar, 2025. "Portfolio selection revisited," Annals of Operations Research, Springer, vol. 346(1), pages 137-155, March.
    • Handle: RePEc:spr:annopr:v:346:y:2025:i:1:d:10.1007_s10479-024-06340-7
    DOI: 10.1007/s10479-024-06340-7
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