Focused Estimation in Portfolio Selection Problems

We introduce the idea of Minimum Expected Loss estimates to propose an estimator for portfolio selection problems. In particular, we propose MELO estimators for the Global Minimum-Variance portfolio, Tangency Portfolio, and... [ view full abstract ]

We introduce the idea of Minimum Expected Loss estimates to propose an estimator for portfolio selection problems. In particular, we propose MELO estimators for the Global Minimum-Variance portfolio, Tangency Portfolio, and Treynor-Black model. We develop the theoretical framework, perform simulation exercises, and develop an empirical study to compare our MELO proposal to other competing alternatives in term of predictive power, and profitability. Our proposed exhibits better finite sample properties compared with competing alternatives, especially when the Tangency portfolio is taken as asset allocation strategy.