Enhanced Portfolio Optimization

Portfolio optimization should provide large benefits for investors, but standard mean-variance optimization (MVO) works so poorly in practice that optimization is often abandoned. Many of the approaches developed to address this issue are surrounded by mystique regarding how, why, and whether they really work. So, we sought to simplify, unify, and demystify optimization. We identified the portfolios that cause problems in standard MVO, and we present here a simple enhanced portfolio optimization method. Applying this method to industry momentum and timeseries momentum across equities and global asset classes, we found significant alpha beyond the market, the 1/N portfolio, and standard asset pricing factors.

Automated summary

The study focused on addressing issues in portfolio optimization and introduced a simple enhanced method. Applying this method to industry and timeseries momentum resulted in significant alpha beyond market and standard factors.