Portfolio Selection Using Portfolio Committees

Abstract

The author proposes a committee approach to portfolio selection. Because each optimal portfolio is a combination of three basic elements—strategy, covariance matrix, and risk type—the author first augments the combination to 250 optimal portfolios at each estimation period. The author then defines a score to select the best portfolio to hold in the next period. Survival of the fittest, the superior performance of the combination portfolio, demonstrates that the committee approach to portfolio selection is not only effective but also easy to implement. TOPICS: Portfolio theory, portfolio construction Key Findings • This article proposes a flexible and easy-to-implement committee approach to portfolio selection. • This article defines an algorithm that proposes a score to select the best portfolio out of 250 augmented portfolios. • In survival of the fittest, evidence from several datasets shows that the resulting combination portfolio overcomes the distributional uncertainty and exhibits superior annualized performance.