The process of choosing the best combination of assets to attain investment goals while minimizing risk is called portfolio optimization. Historically, this has been accomplished manually, relying on the knowledge of human portfolio managers. Nevertheless, with the rise of machine learning (ML) technology, there is increasing interest in applying ML algorithms to optimize portfolios.

This article will evaluate the advantages and disadvantages of utilizing ML for portfolio optimization and compare it to the conventional method of human expertise.


Artificial Intelligence

In the realm of artificial intelligence, machine learning refers to the process of training algorithms on data to identify patterns and make predictions. When applied to portfolio optimization, ML algorithms can analyze extensive financial data, including historical prices, economic indicators, and news sentiment, to uncover trends and patterns that human analysts may overlook.

One significant benefit of utilizing ML for portfolio optimization is its ability to swiftly and accurately process vast amounts of data. This can empower portfolio managers to identify opportunities and risks in real-time and adjust their portfolios accordingly.

ML algorithms can also be leveraged to develop more intricate investment strategies, such as factor investing and dynamic asset allocation. These strategies employ statistical models to pinpoint the factors that drive asset prices and modify portfolios accordingly. ML algorithms can help recognize these factors and adapt portfolios in real-time, resulting in greater returns and reduced risk.

To cite an example, close to the reality of Università Cattolica di Milano, Venus Fund, a closed-end investment fund founded by some Cattolica and Bocconi students, is utilizing machine learning to enhance their securities selection and allocation process and optimize portfolio weights. By leveraging these techniques, they aim to achieve greater returns and outperform traditional investment strategies.



Human Expertise

Despite the potential benefits of utilizing ML for portfolio optimization, there are still several advantages to relying on human expertise. Human portfolio managers possess years of experience and specialized knowledge that ML algorithms simply cannot match. They can employ their intuition and discernment to spot opportunities and risks that may not be discernible in the data.

Human portfolio managers can also consider non-financial factors, such as geopolitical risks and social trends, that may impact asset prices. Although ML algorithms can scrutinize news sentiment and other data sources, they may not be able to detect the nuanced intricacies that human analysts can.

Another edge of human portfolio managers is their ability to adapt portfolios based on market conditions and investor preferences. For example, in the event of a sudden market downturn, human portfolio managers may be able to adjust their portfolios to minimize losses and safeguard investors. ML algorithms may not be as nimble as human analysts in adapting to fluctuating market conditions.


To conclude, both ML and human expertise offer distinct advantages and disadvantages in the realm of portfolio optimization. ML algorithms can analyze vast amounts of data swiftly and accurately, facilitating real-time identification of opportunities and risks. However, human portfolio managers’ years of experience and specialized knowledge enable them to detect subtle nuances and adapt portfolios to changing market conditions and investor preferences.

Ultimately, it may be most effective to leverage the strengths of both ML and human expertise. For instance, portfolio managers can use ML algorithms to identify opportunities and risks and then rely on their expertise to make the final investment decisions. By integrating the strengths of both approaches, portfolio managers can optimize portfolios, minimize risk, and maximize returns.

Now, dear readers, which approach do you prefer?


  • Eugenio Ci

    Well done, Doctor Perego!


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