Maximize Adjusted R2

Maximize Adjusted R2

In this model, the utility function is the adjusted R2, i.e., StyleADVISOR chooses the subset of indices that gives the highest adjusted R2. Recall that the adjusted R2 is defined as follows:

    Adjusted R2 = 1 - ((m - 1) / (m - n)) * (Var(e) / Var(M))
       where
          Var(M) = variance of manager returns
          Var(e) = variance of excess return of manager over benchmark, using current subset

 
 

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