Mean-Variance Portfolio Selection: Statistical Properties and Distributionally Robust Optimization

Abstract

We study Markowitz's mean-variance portfolio optimization problem. When practically using this model, the mean vector and the covariance matrix of the assets returns often need to be estimated from the sample data. The sample errors will be propagated to the optimization output. In this paper, we consider three commonly used mean-variance models and build the asymptotic properties for the conventional sample approximations that are widely adopted and studied, by leveraging the stochastic optimization theory. We show that for all three models, under certain conditions the sample approximations have the desired consistency and achieve a convergence rate of square root of sample size, and the asymptotic variance depends on the first four moments of the returns. To address the variability and the uncertainty in the data driven portfolio optimization, we further consider the distributionally robust optimization (DRO) for the mean-variance model. For the ambiguity sets constructed by the $ϕ$-divergence and the Wasserstein distance, we build the tractable reformulations for the DRO models. We conduct numerical experiments to test the asymptotic properties for the estimation. We also conduct experiments to illustrate that the asymptotic normality might not hold when the fourth moments of the returns do not exist.