Dynamic Scenario-Based Portfolio Optimization for Multi-Asset ETFs
Abigail A. Mensah, Ali M. Jaffri, Nicholas Appiah W. Brent Lindquist, Svetlozar T. Rachev, Frank J. Fabozzi
Abstract
Portfolio outcomes may depend as much on trading restrictions as on how returns are modeled. We compared historical moving-window returns with conditional scenarios from ARMA--GARCH models and a Student-$t$ copula for 30 U.S.-listed exchange-traded funds. Matched mean--variance and conditional value-at-risk portfolios were evaluated under long-only and limited long--short bounds over 946 sessions. Historical portfolios had higher observed reward--risk ratios in most comparisons, but no paired difference remained significant after multiple-testing adjustment. Conditional scenarios did not consistently reduce realized downside risk. We distinguished changes in target weights from trades required to rebalance holdings after market movements. Relaxing the target-adjustment limit changed exposures, turnover, and some returns more than varying scenario count or seed in the examined tests. These findings suggest that assessments of conditional return inputs should consider portfolio constraints and trading requirements.
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