Robust Portfolio Optimization with Transaction Cost for Risky and Risk-Free Assets Coexisting

Abstract

A robust mean-variance portfolio selection model with transaction cost is presented for the case that both risky and risk-free assets exist in the market and expected returns of assets are uncertain and belong to a convex polyhedron. The model helps investors to identify such portfolios that expectations of investors are ensured even if the worst case in the expected returns of assets occurs. Analytical expression of the optimal portfolio determined by the proposed model is derived based on the Lagrange method for constrained optimization. Empirical analysis with three real stocks is performed to give the efficient frontier of portfolios.