A Generalized Approach to Portfolio Optimization: Improving Performance by Constraining Portfolio Norms Introductory The title of the article is A Generalized

Approach to Portfolio Optimization: Improving Performance by Constraining Portfolio Norms where the authors propose a new general framework to find well perform portfolios in the presence of estimation error. The volume and issue number are Vol. 55, No. 5, and publication date is on May 2009. The name of authors in the journal article is Victor DeMiguel, Lorenzo Garlappi, Franciso J.Nogales and Raman Uppal. Literature Review The main purpose of the articles is working out on a general framework to determine the portfolios with superior out-of-sample performance in the presence of estimation error. Subject to the additional constraint that the norm of the portfolio-weight vector to be smaller than a given threshold value, it is say that the solution for the traditional minimum-variance problem is heavily rely by this general framework. In this paper, they develop the new approach for the determinations for optimal portfolio weights in the presence of estimation error by treating the weights rather than the moments of assets return as the objects of interest to be estimated. Thus they introduce the constraint that the norm of the portfolio-weight vector be smaller than a given threshold value. In this paper, they show several ways of showing the literature on optimal portfolio choice in the presence of estimation error. 1 of the ways is, 1st they show they framework as special cases the shrinkage approaches, by proving that if one can retrieves the shortsale-constrained minimum-variance portfolio as if one can solves the minimum-variance problem which subject to the constraint show the sum of the absolute values of the weights(1-norm) to be equal or smaller than one. 2nd is one recovers the class of portfolio as if one constrains the sum of the squares of the portfolio weights (2-norm) to be smaller than a given threshold. Lastly, they constraining the squared 2-norm of the portfolio-weight vector to be equal or smaller than 1/N gives the 1/N portfolio. Second way, they propose partial minimum-variance portfolio which is a class of portfolio they termed, obtained by using the classical conjugate-gradient method to solve the minimum-variance problem. Third way, they put in the Bayesian interpretation for the norm-constrained portfolio but it is different from previous

traditional Bayesian because it is in term of having certain prior level of belief on portfolio weights rather than on moments of asset returns. Fourth, reduce estimation error in regression analysis by approaching to minimum-variance portfolio selection which related in the statistics and chemo metrics literature and its optimal portfolio weights in an unconstrained minimum- or mean- variance problem as coefficients of an ordinary least squares regression. Fifth, they compare their out-of-sample performance of their generalized framework (norm-constrained portfolios) to 10 strategies for 5 different data sets which show they framework is applicable to allows one to calibrate the model to improve its out-of-sample performance by using historical data. In overall, the authors provide a general unique framework for determining portfolios for investor in the presence of estimation error. This journal show the framework is not based on some of all of the elements of the sample covariance matrix but shrinking directly the portfolio-weight vector. They also found out the norm-constrained portfolios always have a higher Sharpe ratio than other alternative portfolio strategies. Summary The journal articles show and provide a new generalized approach for investor in choosing their portfolio optimization, by constraining portfolio norms and thus improve the performance of the portfolio optimization. It is for me to say they done a great job by providing a better generalized framework which have higher Sharpe ratio than other alternative portfolio strategies now a day, however this general framework is subject to the additional constraint that the norm of the portfolio-weight vector to be smaller than a given threshold value. In overall, the generalized approach is good as they use their framework to propose several new portfolio strategies such as shrinkage interpretation and a Bayesian interpretation, plus propose 10 strategies across 5 data sets and still obtain high Sharpe ratio.

Multivariate Shrinkage for Optimal Portfolio Weights Introductory The topic is about optimal portfolio weight which investor determines their target for their portfolio selection weights. The title of the article is Multivariate Shrinkage for Optimal Portfolio Weights. The Journal reference is The European Journal of Finance, whereas the volume and issue number are vol. 13, No. 5, 441 458, and the

publication date is July 2007. The authors of the journal are Vasly Golosnoy & Yarema Okhrin. Literature Review The article is to propose a multivariate shrinkage methodology to improve the Markowitz portfolio procedure by applying the shrinkage estimator directly to portfolio weights. It will allow the optimization task to include the estimation risk within the portfolio weights. The main idea of this journal article is to construct shrinkage portfolio weights as a weighted sum of the estimated Markowitz optimal weights and the target portfolio weights. They propose to use the non-stochastic target vector for applying the shrinkage directly to the portfolio weights. The idea is as if uncertainty is large for Markowitz weights, investor should stay close to the target; and if uncertainty is low, should go for Markowitz proportions. To seek out the optimal trade-off between the bias from the shrinkage target and the estimation risk in Markowitz is the main idea of this shrinkage methodology. For their approach is aim to find out the optimal level in terms of expected utility, between the bias cause by the non-stochastic shrinkage target vector c and the estimation risk in Markowitz proportion where as the sample size n determine the amount of estimation risk. The Markowitz approaches have 2-step procedure which 1st is estimate the distribution parameters, 2nd is plug in the estimated parameters into portfolio optimization task which as true value but not as estimators. The authors consider the estimator as a random vector, thus extend the classical Markowitz procedure one step further by substitute the weights into the maximization problem and determine optimal shrinkage factors a. The variation of shows as problem of additional risk due to unknown true distribution parameters which their approach take into accounts of the estimation risk into the classical portfolio procedure. 

This is the single shrinkage optimization task and the corresponding shrinkage portfolio weights. In the end, they did empirical study by putting the proposed shrinkage methodology for different targets with a number of benchmark strategies and the result show the overall best strategy is about 40% of cases, for the shrinkage to

relative market capitalizations in term of both the expected utility and for Sharpe ratio performance criteria. Summary The authors had successfully uses 2 non-stochastic targets to prove to be the longterm robust alternatives for portfolio composition which have a clear economic interpretation. They also apply single- and multi-shrinkage approaches into their data calculation which lead to more specific and convincing way to show the difference and how single- and multi-shrinkage approaches are better use off in investor own portfolio weights. Moreover, they consider about investing in target weights by in equal proportions or follow relative market capitalization, the idea of non-Markowitz benchmark strategies. In overall they manage to get 40% cases of overall best

strategy, and show the shrinkage to relative market capitalization as best practical alternative among all other considered approaches.

Global Portfolio Optimization Introductory The title of this article is Global Portfolio Optimization which show the framework or model that can be use in portfolio optimization for investor when come to invest on foreign assets and securities. The publication date is September 1992 and the authors names are Fischer Black and Robert Litterman. Literature Review Global portfolio optimization is a framework that authors try to propose for investors that with global portfolio bonds and equities and guide in term of awareness should have on their asset allocation decisions. It is also about the proportions of funds for investors should invest in asset classes of many different countries and their level of degrees in currency hedging which is the most important element in decision making for the global portfolio proportion. Besides that, it is important for investor to have a set of auxiliary assumption to augment their view on the foreign asset, and usually historical return used for estimation for future return actually provide poor guides. This article show an approach which is combine 2 established tenets of modem portfolio theory to solve the problem of plagued quantitative asset allocation models, which are the mean-variance optimization framework of Markowitz and the capital asset pricing model (CAPM) of Sharpe and Lintner.

The authors approach allow the outlook for global equities, bonds and currencies with the risk premiums generated by Blacks global version of CAPM equilibrium to be use for investor when comes to combine their views about the outlook. Excess returns that equate the supply and demand for global assets and currencies are the equilibrium risk premiums in the model. In this model, the equilibrium risk premiums actually generate optimal portfolios that is better than others which have always include large long and short position, this model give a neutral reference point for expected return and gravitates toward a balance which the portfolio actually tilts in the direction of assets which favored by the investors. Besides that, the model did not assume the world is always at CAPM equilibrium, but is that the imbalances in markets will tend to push back the variation of the expected returns that move away from their equilibrium values to origin places. This suggests that investor can profit by combining their views for return with the information that had in equilibrium prices and return in different markets as it is reasonable to assume the expected return are not possible to deviate too far from its equilibrium values as imbalances in market will push them back. So, the equilibrium risk premiums actually provide a centre point for expected return and used for optimization, and the expected return will deviate from equilibrium risk premium according the explicitly stated views of the investors. It also can to be said the deviation from equilibrium actually very dependable on the confidence level in the investor angle of views for each assets and currencies. Summary This model allows investors to learn that the inclusion equities, bonds and currencies with a global CAPM equilibrium show significantly improvement in the behavior of these models. Furthermore, it shows the existent of difference to distinguish between the set of expected excess return and the views of investors that used to drive the portfolio optimization. These all allows investor to generate their own optimal portfolio, which start in a set of neutral weight combination of portfolio, and then tils to the direction that the investors favor views. The authors bring contribution which helps to give new ideas for investor to consider, or reconsider when comes to decision making for their global portfolios.