Title: On functional log portfolios

Authors: Dimitrios D. Thomakos; Rafael Yahlomi; Dimitrios Karaoulanis

Addresses: Department of Business Administration, National and Kapodistrian University of Athens, Greece ' Yahlomi Investments Ltd., Israel ' Department of Electrical and Computer Engineering, National Technical University of Athens, Greece

Abstract: This paper shows that trying to maximise portfolio returns or minimise portfolio variance via a monotonic but otherwise positive transformation results in a unique portfolio functional that is given by the natural logarithm. This is a novel result of theoretical and practical interest for two reasons. First, our theoretical results are highly associated with, but at the same time different from, the theory and applications of the log-optimal portfolios which have been derived under quite different and complicated conditions. Second, our empirical results show that our new approach, which we term functional log-portfolios, strongly support the use of this new portfolio allocation approach - as being highly competitive to both the optimal log-portfolio and other kinds of portfolios traditionally used in the literature and practice.

Keywords: asset allocation; portfolio optimisation; log-optimal portfolio; monotonic transformation; portfolio bounds.

DOI: 10.1504/IJPAM.2024.137847

International Journal of Portfolio Analysis and Management, 2024 Vol.2 No.4, pp.342 - 378

Received: 17 Jan 2023
Accepted: 02 Mar 2023
Published online: 05 Apr 2024 *

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