A comparison of minimum variance and maximum Sharpe ratio portfolios for mainstream investors

Abstract

PurposeMotivated by the recent theoretical rehabilitation of mean-variance analysis, the authors revisit the question of whether minimum variance (MinVar) or maximum Sharpe ratio (MaxSR) investment weights are preferable in practical portfolio formation.Design/methodology/approachThe authors answer this question with a focus on mainstream investors which can be modeled by a preference for simple portfolio optimization techniques, a tendency to cling to past asset characteristics and a strong interest in index products. Specifically, in a rolling-window approach, the study compares the out-of-sample performance of MinVar and MaxSR portfolios in two asset universes covering multiple asset classes (via investable indices and their subindices) and for two popular input estimation methods (full covariance and single-index model).FindingsThe authors find that, regardless of the setting, there is no statistically significant difference between MinVar and MaxSR portfolio performance. Thus, the choice of approach does not matter for mainstream investors. In addition, the analysis reveals that, contrary to previous research, using a single-index model does not necessarily improve out-of-sample Sharpe ratios.Originality/valueThe study is the first to provide an in-depth comparison of MinVar and MaxSR returns which considers (1) multiple asset classes, (2) a single-index model and (3) state-of-the-art bootstrap performance tests.

Portfolio Optimization Project

“…This cycle is ideal for those financial backers who need to strengthen the gamble return trade-off, as it is designed to raise the return for each additional unit of risk taken in the portfolio. (Auer, 2021) Portfolio Optimization is great for those financial backers who need to strengthen the gamble return trade-off. Principals often combine various hazardous and riskfree resources to make the most of this trade-off.…”

Research on the Allocation of Investment Funds -- Empirical Analysis of Five Listed Companies

“…One research proposed a two-stage portfolio optimization method by considering asset forecast information to enhance the performance and robustness of a portfolio in actual commercial business [5]. Moreover, one study compares the out-of-sample performance of mixed portfolio method-Minimum Variance and Maximum Sharp ratio in two asset universes covering multiple asset types and for two estimation methods (full covariance and single-index model) which applied universally in capital market [6].…”