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Multi-Period Portfolio Optimization: Translation of Autocorrelation Risk to Excess Variance

Byung-Geun Choi (bgchoi***at***umich.edu)
Napat Rujeerapaiboon (napat.rujeerapaiboon***at***epfl.ch)
Ruiwei Jiang (ruiwei***at***umich.edu)

Abstract: Growth-optimal portfolios are guaranteed to accumulate higher wealth than any other investment strategy in the long run. However, they tend to be risky in the short term. For serially uncorrelated markets, similar portfolios with more robust guarantees have been recently proposed. This paper extends these robust portfolios by accommodating non-zero autocorrelations that may reflect investors' beliefs about market movements. Moreover, we prove that the risk incurred by such autocorrelations can be absorbed by modifying the covariance matrix of asset returns.

Keywords: portfolio optimization, semidefinite programming, second-order cone programming, robust optimization

Category 1: Robust Optimization

Category 2: Stochastic Programming

Category 3: Applications -- OR and Management Sciences (Finance and Economics )


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Entry Submitted: 06/22/2016
Entry Accepted: 06/22/2016
Entry Last Modified: 09/19/2016

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