The next Brown Bag Seminar is scheduled for Wednesday, April 5th, 2017, 12.00-13.00 in seminar room D3.0.221.

Our speaker will be Katarina Lucivjanska (Pavol Jozef Safarik University).

She will give a talk on

"Optimal Granularity for Portfolio Choice" (joint with Nicole Branger and Alex Weissensteiner)

.

Abstract: Many optimization-based portfolio rules fail to beat the simple 1/N rule out-of-sample because of parameter uncertainty. In this paper we suggest a grouping strategy in which we first form groups of equally weighted stocks and then optimize over the resulting groups only. In a simplied setting we show analytically how to optimize the trade-o between drawbacks from parameter uncertainty and drawbacks from deviating from the overall optimal asset allocation. We illustrate that the optimal group size depends on the volatility of the assets, on the number of observations and on how much the optimal asset allocation divers from 1/N. Out of sample back-tests confirm the validity of our grouping strategy empirically.