Enhanced Portfolio Optimization

Lasse Heje Pedersen, Abhilash Babu, Ari Levine

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Portfolio optimization should provide large benefits for investors, but standard mean–variance optimization (MVO) works so poorly in practice that optimization is often abandoned. Many of the approaches developed to address this issue are surrounded by mystique regarding how, why, and whether they really work. So, we sought to simplify, unify, and demystify optimization.
We identified the portfolios that cause problems in standard MVO, and we present here a simple “enhanced portfolio optimization” method. Applying this method to industry momentum and timeseries momentum across equities and global asset classes, we found significant alpha beyond the market, the 1/N portfolio, and standard asset pricing factors.
TidsskriftFinancial Analysts Journal
Udgave nummer2
Sider (fra-til)124-151
Antal sider28
StatusUdgivet - 2021

Bibliografisk note

Published online 19. February 2021.