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Portfolio Construction in Europe: Screening Versus Optimization

categories: Portfolio Construction and Optimization, PMA, Equities, Research Paper, KOPMAN Leonid, PENADES Elizabeth, general

We compared Screening and Optimization approaches to portfolio construction for the European market using the methodology found in Grinold and Kahn [1999] and Muller [1993]. We obtained similar results to those we previously saw in the US market. Optimization clearly outperformed the screening methods, producing the best IRs in 10 out of 12 cases. The worst-performing method was Cap-Weighted Screening. This is because the wide variation in market capitalization within the constructed portfolios leads to a large imbalance in the portfolio's composition.

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