On out of sample errors in portfolio optimization
: a study of the portuguese market

  • João Fernando Henriques Bento (Student)

Student thesis: Master's Thesis


Motivated by a long-standing notion of the challenge that is investing successfully in the Portuguese stock exchange, this thesis studies the implementation in Portugal of a newmodel that tackles one of portfolio optimization’s greatest obstacles: estimation errors. The Galton model, originally developed and tested in the United States market, uses a discovered pattern in out of sample errors, the difference between forecasted and realized values in out of sample tests, to correct historical inputs. These errors are mostly disregarded by other optimization efforts. With the corrected inputs, the model delivers a performance upgrade all around - more sensible weighting of the assets, improved return performance, returns concentrated around its mean avoiding extreme occurrences, less turnover and, above all, accurate forecasting of the portfolios’ volatility, in the same line as the models’ conclusions in the American market.
Date of Award26 Apr 2022
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorPedro Barroso (Supervisor)


  • Covariance matrix
  • Out of sample errors
  • Portfolio optimization
  • Risk management


  • Mestrado em Finanças

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