SABER: Stochastic-Aware Bootstrap Ensemble Ranking for portfolio management

Abstract

Portfolio management (PM) is a central subject of finance that presents many unresolved challenges. Although solutions have been proposed since the 1950’s, recent advances in machine learning are revolutionizing investments. Whereas supervised paradigms such as regression and classification are established in this direction, emerging research suggests that the learning-to-rank (LtR) paradigm can be more effective. Yet, these works are not many and overlook some important aspects. These aspects include the risk inherent in stocks, feature representation, portfolio cardinality and allocation. Addressing these gaps, this paper presents Stochastic-Aware Bootstrap Ensemble Ranking (SABER), an LtR method that directly minimizes the uncertainty and improves ranking performance. In addition, we propose Merged Bootstrap Selection for dynamic portfolio cardinality optimization. Trained on macroeconomic, fundamental and market indicators, the proposed methods outperform a state-of-the-art LtR approach, reaching annual returns and volatility of 83.48% and 29.89% across 6 years. The former also considers renowned weight allocation methods and achieves Sharpe and Sortino ratios of 2.79 and 5.28 respectively. Finally, the computational complexity of the proposed method is proven comparable to that of current methods.