Title: A robust approach to optimal portfolio choice with parameter uncertainty
Authors: Nathan Lassance - UCLouvain (Belgium) [presenting]
Alberto Martin-Utrera - Iowa State University (United States)
Majeed Simaan - Stevens University (United States)
Abstract: It is well known that estimated mean-variance portfolios deliver, on average, poor out-of-sample performance. A lesser-known fact that we characterize is that their out-of-sample performance is also very volatile. Using our analytical characterization of out-of-sample performance volatility, we propose a measure of portfolio robustness defined as the ratio between out-of-sample utility mean to out-of-sample utility standard deviation. We exploit our measure of portfolio robustness to calibrate shrinkage portfolios and show that they deliver better performance than those that ignore parameter uncertainty or only optimize out-of-sample utility mean.