Abstract
Various portfolio-decision behaviours observed among professional investors, such as qualitative investing, factor ranking, portfolio concentration etc., have not been unified under a coherent theory. This paper unifies portfolio theory and practices by introducing a behaviour-validated information and Pareto double-efficiency allocation model. We establish that investor behaviours manifest their pursuit of proximity to their perceived information, despite potential fuzziness and biases. Out-of-sample backtesting shows even estimation-free directional views may enhance portfolio performance more effectively than covariance estimation. This empirically rationalises qualitative investing. This paper argues modelling portfolio selection as a cognitive process may be more suitable than one-shot optimisation.
| Original language | English |
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| Publication status | Unpublished - 2023 |