Comparative Analysis Of Investment Strategies With Transaction Costs

Since Markowitz established the mean-variance model to quantify the return and risk of assets and build effective frontier to choose the optimal portfolio,the focus of portfolio management has shifted from choosing single asset to distributing assets with risk diversification.In the unpredictable financial market,investors and scholars are deeply fascinated by the construction of portfolio with excess returns.Therefore,many heuristic portfolios that are not value-dependent are developed from the mean-variance framework.However,investors should not be cheated by the "so-called" performance displayed by fund managers.In the non-frictionless market,transaction is not free.In fact,transaction costs may lead to a large reduction in investors' income and limit the arbitrage space of investors.In an era of universal investment,it is becoming a trend to disperse risk and allocate investment portfolio scientifically in China.How to integrate transaction cost into the optimization process of investment portfolio,and how does different investment strategies perform under the existence of transaction cost? These problems deserve investors to learn and think about.In this paper,the linear transaction cost is incorporated into the optimization model of mean-variance portfolio and the minimum risk portfolio.The dynamic optimization algorithm of portfolio considering transaction cost is obtained afterwards.By changing the proportion of transaction costs and frequency of trades,this paper comprehensively and systematically analyzes the out of sample performance of these two portfolios and equal-weighted portfolio when transaction cost exists.This paper is useful to help investors understand the important role of transaction cost in portfolio construction,to avoid unnecessary losses,and to guide investors to learn from the dynamic optimization algorithm developed in this paper for portfolio management,considering the existence of transaction cost in reality,and finally choose the optimal investment management strategy.Firstly,based on the extensive reading of previous research,combined with relevant theories,this paper selects three portfolio models as the research objects of comparative analysis within and without the mean-variance framework,considering the estimation error problems of traditional man-variance portfolio.Then we choose the appropriate transaction cost measurement: linear transaction cost,which is incorporated into the portfolio optimization model,and construct a dynamic optimization algorithm with transaction cost.Based on the dynamic optimization results of each investment strategy,this paper estimates the out of sample performance of each portfolio when the transaction cost exists,mainly from three dimensions: separate in-depth analysis of the out of sample performance of each portfolio with the existence of transaction cost,comprehensive comparison of the out of sample performance of three investment strategies considering the transaction cost,and discussion of each investment strategy considering the transaction cost by market state.In order to verify the effectiveness of the dynamic portfolio optimization algorithm,this paper selects ten industry indexes of China Securities Index as the construction assets to form the portfolio under three investment strategies.The results show that the portfolio optimization can effectively restrain the turnover rate of the portfolio,avoid excessive trading,and achieve the balance between the optimization objectives and the transaction cost.Compared with the portfolio optimization model without considering the transaction cost,it has more robust and excellent performance.Each portfolio strategy shows different asset allocation and investment performance under different transaction frequency,transaction cost proportion and market state.Investors should choose the best portfolio according to the actual transaction conditions and market environment.In the case of transaction costs,turnover rate becomes one of the main factors affecting portfolio performance.The turnover rate results of each model can explain the out of sample performance of each model to a certain extent.The innovation of this paper is that the performance of different investment strategies involving transaction costs is compared and analyzed by changing the setting of the transaction scenarios and the market states,which can help investors fully understand the impact of transaction cost under the uncertain economic environment.This paper investigates performance of different investment strategies with the existence of transaction costs provides reference for investors to choose the optimal investment strategies,and inspire investors to make more realistic choices.