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On Portfolio Optimization: The Benefits of Constraints in the Presence of Transaction Costs
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2014 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Most studies view transaction costs and constraints separate in the mean-variance framework. As such, I evaluate the benefits of holding and turnover constraints in the presence of transaction costs on Swedish Asset Returns. In theory, the benefits should be limited when transaction costs are included in the portfolio rebalancing problem. By using the model developed by Mitchell and Braun (2003), my results indicate that there are benefits of holding constraints in the mean-variance optimization. The main issue with the long-only portfolio is its lack of diversification. The strategy allocates the majority of the investment in 15 out of 100 assets. By imposing holding constraints, the portfolio becomes more diversified while reducing turnover volume and increasing Sharpe ratio. I find that the homogenous 1/N holding constraint increases monthly Sharpe ratio performance by 50 percent over the entire sample. However, the results are not consistent over all samples and not statistically significant. Further, turnover constraints only marginally increase performance, which more likely originates from the increase in diversification.

Place, publisher, year, edition, pages
2014. , 34 p.
Keyword [en]
Portfolio Optimization, Transaction Costs, Holding Constraints, Turnover Constraints, Investment Strategy, Portfolio Rebalancing Model
National Category
Economics
Identifiers
URN: urn:nbn:se:uu:diva-226818OAI: oai:DiVA.org:uu-226818DiVA: diva2:727434
Subject / course
Economics
Educational program
Bachelor Programme in Business and Economics
Supervisors
Examiners
Available from: 2014-06-27 Created: 2014-06-20 Last updated: 2014-06-27Bibliographically approved

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CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf