Portfolio optimization under transfer coefficient constraint

This article is concerned with a portfolio optimization problem subject to a transfer coefficient constraint, which is intended to generate an enhanced index portfolio with a good ex-post performance. We will show that a standard mean-tracking error model with transfer coefficient constraint can be formulated as a convex minimization problem, which can be solved by a standard optimization software. Also we will show that the transfer coefficient constraint plays an essential role for constructing an enhanced index fund with a good ex-post performance using real stock data in Tokyo Stock Exchange.