A Comparison of Optimal Portfolio Performances of Three Optimization Methods

Aylin Cevizci

Abstract


This study compares performances of three portfolios established based on Markowitz optimization, shrinkage optimization, and Black- Litterman optimization. BIST30 companies are used to test the results. Markowitz optimization is unrestricted, thus generates the highest possible utility. However, portfolio weights display high values of short- selling needs. Shrinkage optimization restricts short selling needs gradually, but it does not block short- selling. On the other hand, Black- Litterman model totally prohibits short- selling. Results show that the lowest utility is originated by Black- Litterman model. Shrinkage model generates average returns and less- than- average risk. Therefore, shrinkage ratio is a strong candidate for future portfolio building. The results also suggest that short selling should be included in portfolio activities to maximize performance. Short- selling improves portfolio performance significantly

Keywords


Optimization techniques, portfolio choice and investment decisions

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International Journal of Commerce and Finance is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 4.0 Unported License.
 

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