Modern investment processes often use quantitative models based on Markowitz's mean-variance approach for determining optimal portfolio holdings. A major drawback of using such techniques is that the optimality of the portfolio structure only holds with respect to a single set of expected returns. Becker, Marty, and Rustem introduced the robust mm-max portfolio optimization strategy to overcome this drawback. It computes portfolio holdings that guarantee a worst case risk/return tradeoff whichever of the specified scenarios occurs. In this paper we extend the approach to include transaction costs. We illustrate the advantages of the mm-max strategy on balanced portfolios. The importance of considering transaction costs when rebalancing portfolios is shown. The experimental results illustrate how a portfolio can be insured against a possible loss without sacrificing too much upside potential.
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