This research paper appeared in The International Journal of Financial Engineering and Risk ManagementSpecial Issue on Applications of Optimization in Finance, Volume 2, Number 4, pp. 283-307.
The traditional Markowitz MVO approach is based on a single-period model. For long-term investors, multi-period optimization offers the opportunity to make “wait-and-see” policy decisions by including approximate forecasts and long-term policy decisions beyond the rebalancing time horizon. We consider portfolio optimization with a composite alpha signal that is composed of a short-term and a long-term alpha signal. We develop a simple two stage multi-period model that incorporates this alpha model to construct the optimal portfolio at the end of the rebalancing period. We compare this model with the traditional single-period MVO model on a simulated example from Israelov & Katz and also a large strategy with realistic constraints and show that the multi-period model tends to generate portfolios that are likely to have a better realized performance.
This paper was co-authored by Vishv Jeet, Senior Researcher, Burgiss.
Authors
Kartik Sivaramakrishnan, PhD
Director, Product Solutions
Dieter Vandenbussche
Managing Director, Equity Research
