Renato Canil de Souza
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An analysis of a mean-variance enhanced index tracking problem with weights constraints
Wanderlei Lima de Paulo , Marta Ines Velazco Fontova , Renato Canil de Souza doi: http://dx.doi.org/10.21511/imfi.15(4).2018.15Investment Management and Financial Innovations Volume 15, 2018 Issue #4 pp. 183-192
Views: 1417 Downloads: 124 TO CITE АНОТАЦІЯIn this paper, the authors deal with a mean-variance enhanced index tracking (EIT) problem with weights constraints. Using a shrinkage approach, they show that constructing the constrained EIT portfolio is equivalent to constructing the unconstrained EIT portfolio. This equivalence allows to study the effect of weights constraints on the covariance matrix and on the EIT portfolio. In general, the effects of weights constraints on the EIT portfolio are different from those observed in the case of global minimum variance portfolio. Finally, the authors present a numerical asset allocation example, where the S&P 500 index is used as the market index to be tracked using a portfolio composed of ten stocks, in which the constrained EIT portfolio shows a satisfactory performance when compared to the unconstrained case.