A COMPARISON OF OPTIMAL PORTFOLIO PERFORMANCES OF THREE OPTIMIZATION METHODS

Aylin Cevizci
2016 International Journal of Commerce and Finance   unpublished
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
more » ... lack-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
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