Exploring Parsimonious Principles to Unify Active Portfolio Selection (II): Validation

TY - UNPB

T1 - Exploring Parsimonious Principles to Unify Active Portfolio Selection (II): Validation

AU - Cheung, Wing

PY - 2024

Y1 - 2024

N2 - Investor portfolio-selection behaviours remain inadequately integrated into a unified framework. We demonstrate that only two principles are necessary to span a comprehensive framework and unify diverse active portfolio-selection behaviours: (1) Subjective Allocation Rule (SAR)-based allocation and (2) Minimum Tracking Error (MTE)-guided mimicking. These principles leverage efficiency, value-adding, and cognition-friendly mechanisms to transform broader, more natural investor insights - whether quantitative or qualitative - into optimal portfolios aligned with their true intensions. Our empirical evidence reveals that incorporating investor subjectivity can enhance performance, outperforming traditional frameworks such as Markowitz’s. This paper, the second of two, focuses on the empirical evidence.

AB - Investor portfolio-selection behaviours remain inadequately integrated into a unified framework. We demonstrate that only two principles are necessary to span a comprehensive framework and unify diverse active portfolio-selection behaviours: (1) Subjective Allocation Rule (SAR)-based allocation and (2) Minimum Tracking Error (MTE)-guided mimicking. These principles leverage efficiency, value-adding, and cognition-friendly mechanisms to transform broader, more natural investor insights - whether quantitative or qualitative - into optimal portfolios aligned with their true intensions. Our empirical evidence reveals that incorporating investor subjectivity can enhance performance, outperforming traditional frameworks such as Markowitz’s. This paper, the second of two, focuses on the empirical evidence.

M3 - Working paper

BT - Exploring Parsimonious Principles to Unify Active Portfolio Selection (II): Validation

PB - SSRN

ER -