ABSTRACT

The Best Constant Rebalanced Portfolios (BCRP) strategy is optimal if the market is independent and identically distributed (i.i.d.; Cover 1991); however, this assumption may not fit the real market and thus may lead to the inferior performance of the “follow the winner” category. Rather than tracking the winners, the follow the loser approach is often characterized by transferring the wealth from winners to losers. The underlying assumption is the mean reversion (contrarian) idea (Bondt and Thaler 1985), which means that good (poor)-performing assets will perform poor (good) in the subsequent periods. Thus, follow the loser’s approaches often are characterized by transferring capital from poor-performing assets (losers) to good-performing assets (winners). Although this principle is heavily investigated in finance journals, it has not been widely disseminated in the topic of online portfolio selection. However, some algorithms do follow this principle. One famous example is the CRP benchmark. Moreover, Cover’s UP, which buys and holds CRP strategies, can also be viewed as follows the loser approach from the underlying stocks’ perspective, while we categorize it as follow the winner from the experts’ perspective.