Implications of conditional expectation in portfolio theory

This paper examines and explores the implications of using conditional expectation estimatorsin portfolio theory. In particular, we focus on two financial applications – (i) approximation ofthe conditional expectation within large-scale portfolio selection problems, and (ii) performance valuation considering the heavy tails of returns. The aim is to examine the extent to which bandwidth selection and kernel functions impact portfolio returns estimation. Thus, we compare the ex-post wealth obtained from applying the portfolio strategies, which use alternative performance measures based on a conditional expectation.