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.
Original languageEnglish
JournalFinancial Analysts Journal
Issue number2
Pages (from-to)124-151
Number of pages28
Publication statusPublished - 2021

Bibliographical note

Published online: 19. February 2021

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