Portfolio Construction in Europe: Screening Versus Optimization
Jun 1, 2005
We compared Screening and Optimization approaches to portfolio construction for the European market using the methodology found in Grinold and Kahn  and Muller . 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.