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Optimal asset allocation for a large number of investment opportunities

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  • Hans Georg Zimmermann
  • Ralph Grothmann

Abstract

This paper introduces a stock‐picking algorithm that can be used to perform an optimal asset allocation for a large number of investment opportunities. The allocation scheme is based upon the idea of causal risk. Instead of referring to the volatility of the assets time series, the stock‐picking algorithm determines the risk exposure of the portfolio by concerning the non‐forecastability of the assets. The underlying expected return forecasts are based on time‐delay recurrent error correction neural networks, which utilize the last model error as an auxiliary input to evaluate their own misspecification. We demonstrate the profitability of our stock‐picking approach by constructing portfolios from 68 different assets of the German stock market. It turns out that our approach is superior to a preset benchmark portfolio. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Hans Georg Zimmermann & Ralph Grothmann, 2005. "Optimal asset allocation for a large number of investment opportunities," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 13(1), pages 33-40, March.
    • Handle: RePEc:wly:isacfm:v:13:y:2005:i:1:p:33-40
    DOI: 10.1002/isaf.247
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    References listed on IDEAS

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    1. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
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