Robust international portfolio optimization with worst-case mean-CVaR

Abstract

This paper proposes a robust international portfolio optimization model with the consideration of worst-case lower partial moment (LPM) and worst-case mean return. In our model, we assume that the distributions and the first- and second-order moments of distributions of returns of assets and exchange rates are all ambiguous. The proposed model can be reformulated into an equivalent semidefinite programming (SDP) problem, which is computationally tractable. For investigation of the performance of our model, we also give two benchmark models. The first benchmark model is a scenario-based model which uses historical observations of returns to approximate the future distributions. The second benchmark model only considers the ambiguity of distributions but does not consider the ambiguity of the first- and second-order moments of distributions. We conduct empirical experiments in a rolling forward way to evaluate the out-of-sample performances of our proposed model, the two benchmark models, and an equally weighted model using the return measures and various risk-adjusted return measures. The result shows that our model has the best performance. It verifies that investors can obtain benefits when employing the robust model and considering the ambiguity of the first- and second-order moments of distributions.