Robust Portfolio Optimization Using a Simple Factor Model

In this paper we examine the performance of a traditional mean-variance optimized portfolio, where the objective function is the Sharpe ratio. We show results of constructing such portfolios using global index data, and provide a test for robustness of input parameters. We continue by formulating a robust counterpart based on a linear factor model presented here. Using a dynamic universe of stocks, the results for this robust portfolio are contrasted with a naive, evenly weighted portfolio as well as with two traditional Sharpe optimized portfolios. We nd compelling evidence that the robust formulation provides signicant risk protection as well as the ability to provide risk adjusted returns superior to the traditional method. We also nd that the naive portfolio we present outperforms the traditional Sharpe portfolios in terms of many summary metrics.