Talks & Lectures
7 Apr 2022

Financial Engineering Seminar: The Risk of Out-Of-Sample Portfolio Performance

Speaker: Nathan Lassance, assistant professor of finance at LFIN/LIDAM, UCLouvain (Belgium)

Headshot of guest lecturer Nathan Lassance

We theoretically characterize the out-of-sample utility risk of estimated optimal portfolios and demonstrate that it is particularly large in high-dimensional settings or when near-arbitrage opportunities appear available to investors. We use our analytical characterization of performance risk to propose a robustness measure that balances out-of-sample utility mean and volatility and show that neither mean-variance portfolios nor minimum-variance portfolios offer maximal robust performance. Motivated by this finding, we construct robust portfolio combinations that achieve the optimal tradeoff between out-of-sample utility mean and volatility. These portfolios are resilient to estimation errors and outperform those that ignore out-of-sample utility risk. Our analysis highlights the relevance of accounting for out-of-sample performance risk when evaluating and constructing quantitative investment strategies and asset pricing models.

Nathan Lassance is an assistant professor of finance at LFIN/LIDAM, UCLouvain (Belgium). His research focuses on understanding the properties of out-of-sample portfolio performance in order to construct robust investment strategies that deliver on their theoretical promise.

April 7, 11:00 a.m.
Zoom link

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