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A Study on the Mahalanobis Universal Portfolio With and Without Transaction Cost for (2K+1)- Bandwidth Toeplitz Matrices

In: Proceedings of the 11th International Conference on Business, Accounting, Finance and Economics (BAFE 2023)

Author

Listed:
  • Chi-Hau Kor

    (Universiti Tunku Abdul Rahman, Lee Kong Chian, Faculty of Engineering and Science)

  • Sheong-Wei Phoon

    (Universiti Tunku Abdul Rahman, Lee Kong Chian, Faculty of Engineering and Science)

  • Wing-Son Loh

    (Universiti Tunku Abdul Rahman, Lee Kong Chian, Faculty of Engineering and Science)

Abstract

Investing is crucial for wealth accumulation, safeguarding against inflation, and meeting financial objectives. Choosing effective strategies can significantly influence outcomes. Central to this is the Mahalanobis universal portfolio (MUP), characterised by its tendency to yield positive returns over extended durations. This paper delves into its optimisation using $$(2k+1)$$ ( 2 k + 1 ) -bandwidth Toeplitz matrices associated with positive definite Toeplitz matrices. A novel aspect of our study is examining transaction costs’ impact on this portfolio, a territory not previously ventured into. Eight portfolios were formed and obtained from Yahoo! Finance, spanning January 2, 2015, to January 21, 2021, encompassing 1,500 trading days. This paper examines the influence of bandwidth, trading period length, and portfolio sizes on the cumulative wealth investors generate. Alternative investment strategies such as Buy-and-Hold (BH), Constant Rebalanced Portfolio (CRP), and Best Constant Rebalanced Portfolios (BCRP) are scrutinised to gauge their effectiveness in generating wealth. The findings demonstrate that the MUP facilitates notable wealth growth for investors, offering a principal increase and a balance of lower risk with higher returns than other strategies. By incorporating various metrics and transaction costs, the study provides valuable insights into the performance of investment strategies, enabling individuals to make informed decisions to maximise their returns.

Suggested Citation

  • Chi-Hau Kor & Sheong-Wei Phoon & Wing-Son Loh, 2023. "A Study on the Mahalanobis Universal Portfolio With and Without Transaction Cost for (2K+1)- Bandwidth Toeplitz Matrices," Advances in Economics, Business and Management Research, in: Yuen Onn Choong & Fanyu Chen & Keng Soon William Choo & Voon Hsien Lee & Chooi Yi Wei (ed.), Proceedings of the 11th International Conference on Business, Accounting, Finance and Economics (BAFE 2023), pages 13-44, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-342-9_3
    DOI: 10.2991/978-94-6463-342-9_3
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