Z-score vs minimum variance preselection methods for constructing small portfolios
Open Access
- 14 February 2020
- journal article
- Published by LLC CPC Business Perspectives in Investment Management and Financial Innovations
- Vol. 17 (1), 64-76
- https://doi.org/10.21511/imfi.17(1).2020.06
Abstract
Several contributions in the literature argue that a significant in-sample risk reduction can be obtained by investing in a relatively small number of assets in an investment universe. Furthermore, selecting small portfolios seems to yield good out-of-sample performances in practice. This analysis provides further evidence that an appropriate preselection of the assets in a market can lead to an improvement in portfolio performance. For preselection, this paper investigates the effectiveness of a minimum variance approach and that of an innovative index (the new Altman Z-score) based on the creditworthiness of the companies. Different classes of portfolio models are examined on real-world data by applying both the minimum variance and the Z-score preselection methods. Preliminary results indicate that the new Altman Z-score preselection provides encouraging out-of-sample performances with respect to those obtained with the minimum variance approach.Keywords
This publication has 38 references indexed in Scilit:
- An optimization–diversification approach to portfolio selectionJournal of Global Optimization, 2019
- Minimum risk versus capital and risk diversification strategies for portfolio constructionJournal of the Operational Research Society, 2017
- On exact and approximate stochastic dominance strategies for portfolio selectionEuropean Journal of Operational Research, 2017
- Equal Risk Bounding is better than Risk Parity for portfolio selectionJournal of Global Optimization, 2016
- Predicting financial distress of companies: revisiting the Z-Score and ZETA® modelsPublished by Edward Elgar Publishing ,2013
- A new method for mean-variance portfolio optimization with cardinality constraintsAnnals of Operations Research, 2012
- On the coherence of expected shortfallJournal of Banking & Finance, 2002
- Coherent Measures of RiskMathematical Finance, 1999
- ZETATM analysis A new model to identify bankruptcy risk of corporationsJournal of Banking & Finance, 1977
- FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCYThe Journal of Finance, 1968