Overcoming the uncertainties of an economic downturn using a universal portfolio in investment
Abstract
In (Cover and Ordentlich, 1996) a parametric class of
universal portfolios generated by the Dirichlet
) ..., , ( 1 m a a probability distribution is introduced
and the study is focused on the universal portfolios
generated by the Dirichlet (1, …, 1) and Dirchlet (1/2,
…,1/2) distributions. In an earlier study by Cover
(1991) the Dirichlet (1, …, 1) or the uniform portfolio
was shown to perform well over a 22-year period on
stocks listed on the New York Stock Exchange. In this
study, two sets of stock price-relatives of 600 and 430
trading days were selected from the Kuala Lumpur
Stock Exchange. Each set consists of stock pricerelatives
of three Malaysian companies covering the
economic downturn period of October 2008 until
March 2009. The Dirichlet (1, …, 1) and Dirchlet (1/2,
…,1/2) universal portfolios were shown to perform
badly on the two data sets. We show that by varying the
values of the parametric vectors ) , , ( 3 2 1 a a a , it is
possible to find certain parametric vectors
) , , ( 3 2 1 a a a that can perform well on the stocks,
implying that it is possible to ride out the storm in an
economic downturn by choosing an appropriate
universal portfolio. The Dirichlet (1, …, 1) and
Dirichlet (1/2, …,1/2) universal portfolios may not
perform well on all stocks and hence it is important to
identify the appropriate parameter ) ..., , ( 1 m a a that
can bring us higher returns in stock investment.
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