Adaptive universal portfolios

Title: Adaptive universal portfolios
Authors: O'Sullivan, Patrick
Edelman, David
Permanent link: http://hdl.handle.net/10197/3537
Date: 29-Apr-2013
Abstract: The purpose of this paper is to develop a stock selection algorithm with similar properties as Cover’s Universal Portfolio, but providing superior early growth. Cover’s Universal Portfolio generates a growth rate asymptotically equal to the best achievable growth rate over the set of constant rebalanced portfolios. However, Cover’s Universal Portfolio is empirically seen to generate poor early growth. While much research has been conducted in relation to Cover’s Universal Portfolio, much of this has focused on efficient implementation of the algorithm and considerations of market frictions. As such, there remains a significant research gap in addressing the issue of poor early growth generated by Cover’s strategy. With this in mind we develop the Adaptive Universal Portfolio, a sequential portfolio selection algorithm with similar asymptotic properties as Cover’s Universal Portfolio but providing greater early growth. In this paper we provide an analysis of the growth generated by the two algorithms. Furthermore we present empirical evidence of the superior early growth generated by the Adaptive Universal Portfolio. Finally we discuss possible criticisms of the Adaptive Universal Portfolio, including evidence of momentum following and vulnerability to individual stock risks, and provide an insight into possible future work in this area.
Funding Details: Science Foundation Ireland
Type of material: Conference Publication
Publisher: CIBEF
Routledge (Taylor & Francis)
Copyright (published version): 2013, Taylor & Francis
Keywords: Portfolio choice;Universal portfolios;Bayesian analysis;Capital growth models;Kelly criterion
Subject LCSH: Portfolio management
Bayesian statistical decision theory
Investments--Mathematical models
DOI: 10.1080/1351847X.2013.788534
Language: en
Status of Item: Peer reviewed
Conference Details: 18th Forecasting Financial Markets' Conference 2011, Marseilles, France, 25-27 May, 2011
Appears in Collections:FMC² Research Collection

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