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The key problem in portfolio optimization is not per se the optimization itself, but the specification of the inputs, notably the views on ex-ante risk premia. The authors add to the literature on portfolio optimization by proposing a portfolio selection framework that allows an investor to position herself between a risk parity strategy and a mean-variance optimized portfolio. Depending on the confidence in one’s risk premium estimates, the optimal portfolio will be tilted more towards one or the other. The authors bridge the gap between risk premium ignorance of risk parity on the one hand, and risk premium clairvoyance of mean-variance on the other hand. The framework is illustrated for a US investor whose opportunity set consists of equities, bonds and commodities
Working paper met Daniël Haesen, Roderick Molenaar en Thijs Markwat