Cambridge Finance Seminar
Thursday May 8 2014
Barbara White Room, Newnham College
5-6pm
Woo Chang Kim
Assistant Professor,
ISysE, KAIST Visiting Fellow, ORFE, Princeton University
Understanding Robust Portfolios
Abstract
Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the
Markowitz mean-variance model. The main idea is to introduce an uncertainty set for the model
parameters, and to obtain the portfolio with worst-case optimization approach. Although much effort has
been put into forming robust portfolios, there have not been many attempts to analyze the characteristics
of portfolios formed from robust optimization. In this presentation, we discuss the recent finding on the
qualitative characteristics of the robust portfolios. More specifically, there are three main questions to be
addressed:
1) Is robust portfolio really robust?
2) Robust portfolio is different from traditional mean-variance portfolio. Is there any consistent
pattern in regard to this qualitative difference in two portfolios?
3) If robust portfolio is consistently different from traditional mean-variance portfolio, is it possible
to reduce the difference without losing the robustness?
References
[1] Kim, Woo Chang, Jang Ho Kim, and Frank J. Fabozzi (2014) “Deciphering Robust Portfolios”,
Journal of Banking and Finance, under minor revision
[2] Kim, Woo Chang, Frank J. Fabozzi, Patrick Cheridito, and Charles Fox (2014) “Controlling Portfolio
Skewness and Kurtosis without Directly Optimizing Third and Fourth Moments”, Economics Letters,
122, 154-158
[3] Kim, Woo Chang, Min Jeong Kim, Jang Ho Kim, and Frank J. Fabozzi (2014) “Robust Portfolios
That Do Not Tilt Factor Exposure”, European Journal of Operational Research, Available Online, DOI:
10.1016/j.ejor.2013.03.029
[4] Kim, Jang Ho, Woo Chang Kim, and Frank J. Fabozzi (2013) “Composition of Robust Equity
Portfolios”, Finance Research Letters, 10, 72-81
[5] Kim, Woo Chang, Jang Ho Kim, So Hyung Ahn, and Frank J. Fabozzi