A Portfolio Optimization Approach with a Large Number of Assets: Applications to the US and Korean Stock Markets1. (2nd November 2018)

• Record Type: Journal Article
• Authors: Lee, Miyoung; Kim, Jihun; Oh, Sekyung
• Is Part Of: Asia-Pacific journal of financial studies. Volume 47:Number 5(2018:Oct.)
• Page Start: 634
• Page End: 659
• Publication Date: 2018-11-02
• Subjects: Mean‐variance portfolio optimization -- Singular covariance matrix -- Least squares -- Out‐of‐sample performance; Pacific Area -- Economic conditions -- Periodicals; Finance -- Asia -- Periodicals; Finance -- Pacific Area -- Periodicals; Asia -- Economic conditions -- Periodicals; 332.09505
• DOI: 10.1111/ajfs.12233
• Languages: English
• ISSNs: 2041-9945

Abstract

Abstract: We propose a new approach for determining optimal portfolio weights in a mean‐variance framework in cases when there are more assets than observations. We empirically show that our approach attains a higher out‐of‐sample Sharpe ratio, M 2 measure, and CEQ return than other methods. Our approach is also free from problems related to the estimation of the covariance matrix because it does not need and solves the so‐called "corner‐solution problem" of the Markowitz model by minimizing the 2‐norm of the portfolio weight vector.