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Portfolio Optimization Constrained by Performance Attribution

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  • Yuan Hu
  • W. Brent Lindquist

Abstract

This paper investigates performance attribution measures as a basis for constraining portfolio optimization. We employ optimizations that minimize expected tail loss and investigate both asset allocation (AA) and the selection effect (SE) as hard constraints on asset weights. The test portfolio consists of stocks from the Dow Jones Industrial Average index; the benchmark is an equi-weighted portfolio of the same stocks. Performance of the optimized portfolios is judged using comparisons of cumulative price and the risk-measures maximum drawdown, Sharpe ratio, and Rachev ratio. The results suggest a positive role in price and risk-measure performance for the imposition of constraints on AA and SE, with SE constraints producing the larger performance enhancement.

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  • Yuan Hu & W. Brent Lindquist, 2021. "Portfolio Optimization Constrained by Performance Attribution," Papers 2103.04432, arXiv.org.
    • Handle: RePEc:arx:papers:2103.04432
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    1. Svetlozar T. Rachev & R. Douglas Martin & Borjana Racheva & Stoyan Stoyanov, 2009. "Stable ETL Optimal Portfolios and Extreme Risk Management," Contributions to Economics, in: Georg Bol & Svetlozar T. Rachev & Reinhold Würth (ed.), Risk Assessment, pages 235-262, Springer.
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    1. Yuan Hu & W. Brent Lindquist & Svetlozar T. Rachev, 2021. "Portfolio Optimization Constrained by Performance Attribution," JRFM, MDPI, vol. 14(5), pages 1-12, May.
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