PhD Thesis Title: Investing with Minimal Regret.
Supervisors: Dr David Edelman
External Examiner: Professor John Mulvey, Professor of Operations, Research and Financial Engineering, Princeton University
In this thesis, the practical applications of the Capital Growth Theory in the long-term investment management for individual investors is presented. One special case of portfolio management approaches based on CGT is the portfolio that aims to perform as well as the Best Hindsight Constant Mix (BHCM) benchmark, which is the optimal benchmark for a long-term investor. This thesis focuses on this type of portfolio management. First, a dynamic trading strategy (Bootstrap-Aggregated Universal Portfolios, a BaggUP) which aims to achieve the BHCM benchmark is introduced. BaggUP is an unbiased variation of the Universal Portfolio (UP) approach of T. Cover (1991). Next, the concept of the BHCM derivative (Ordentlich and Cover, 1998) is extended to multiple assets and ways to price it are proposed. Practical applications of the BHCM derivative in investment funds are offered. Specifically, the Minimax regret portfolio management approach is introduced. It focuses on the management of an individual’s portfolio during the accumulation stage of a defined contribution (DC) pension plan. The Minimax Regret pension product is designed to efficiently address the asset allocation problem faced by individual investors, with the goal of balancing downside protection with potential for upside. Further, the practical application of the BHCM concept in actively managed funds is presented. In particular, a new method for establishing an upper bound on active management fees is proposed.