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Decision-Induced Ranking Explains Prediction Inflation and Excessive Turnover in SPO-Based Portfolio Optimization

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  • Yi Wang
  • Takashi Hasuike

Abstract

Decision-focused learning (DFL) is attractive for portfolio optimization because it trains predictors according to downstream decision quality rather than prediction accuracy alone. However, SPO(Smart, Predict then Optimize surrogate)-based DFL may produce inflated return signals and unstable portfolio reallocations. This study provides a KKT-based interpretation showing that portfolio decisions can be viewed as ranking over risk- and transaction-cost-adjusted marginal scores. Empirically, we examine prediction inflation and excessive turnover in SPO-trained portfolios, and evaluate clipping, min-max rescaling, and partial portfolio adjustment as practical stabilization mechanisms. The results suggest that realistic output constraints and portfolio-level turnover control improve the implementability of SPO-based portfolio strategies.

Suggested Citation

  • Yi Wang & Takashi Hasuike, 2026. "Decision-Induced Ranking Explains Prediction Inflation and Excessive Turnover in SPO-Based Portfolio Optimization," Papers 2605.01176, arXiv.org.
    • Handle: RePEc:arx:papers:2605.01176
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