An info-gap approach to managing portfolios of assets with uncertain returns

Abstract

Purpose – The purpose of this paper is to provide a quantitative methodology based on information-gap decision theory for dealing with (true) Knightian uncertainty in the management of portfolios of assets with uncertain returns. Design/methodology/approach – Portfolio managers aim to maximize returns for given levels of risk. Since future returns on assets are uncertain the expected return on a portfolio of assets can be subject to significant uncertainty. Information-gap decision theory is used to construct portfolios that are robust against uncertainty. Findings – Using the added dimensions of aspirational parameters and performance requirements in information-gap theory, the paper shows ..