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ACES Presentation
Gang Zhao
Boston University - Manufacturing Engineering
Internship Completed at Investment Technology Group, Boston, MA
Friday - November 7, 2008
12:00 noon

"Robust Optimization and Transaction Cost Modeling for Portfolio Management"


Following the seminal work of Harry Markowitz in 1952, CAPM theory (mean-variance portfolio optimization) has been the one of the main drivers for the proliferation of mutual fund industry. However, the Markowitz model
is sensitive to estimation errors and didn't take into account of the transaction cost. We followed the robust optimization framework by establishing an uncertainty region of return/risk estimations and back tested different strategies using historical data. As a second step, we incorporated ITG's ACE transaction cost model into the formulation to optimize for net portfolio returns ( net return = raw return - cost of rebalancing).

 

 


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