Enhanced Portfolio Optimization

Lasse Heje Pedersen, Abhilash Babu, Ari Levine

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Abstract

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
Number of pages28
ISSN0015-198X
DOIs
Publication statusPublished - 19 Feb 2021

Bibliographical note

E-pub ahead of print. Published online: 19. February 2021

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