Marta Ines Velazco Fontova

In 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.