The Min-Max Portfolio Optimization Strategy: An Empirical Study Considering Transaction Costs
by
Claude G. Diderich
Credit Suisse Asset Management, Switzerland
Coauthors: Wolfgang Marty (Credit Suisse Asset Management, Switzerland)

Modern investment processes often use models based on Markowitz's mean-variance approach for determining optimal portfolio holdings. A major drawback of using such techniques is that the optimality of the portfolio structure only holds with respect to a single set of expected returns. Becker, Marty, and Rustem introduced the robust min-max portfolio strategy to overcome this drawback. It computes portfolio holdings that guarantee a worst case risk/return tradeoff whichever of the specified scenarios occurs. In this paper we extend the approach to include transaction costs. We illustrate the advantages of the min-max portfolio on balanced portfolios by using cross-evaluation. The importance of considering transaction costs when rebalancing portfolios is shown on different examples. The experimental results illustrate how a portfolio can be insured against downside risk without sacrifying too much upside potential.

Date received: January 31, 2000