2025, Vol. 8, Issue 1

author(s)
Ayobami Gabriel Olanrewaju, Adeyinka Oluwasimisola Ajayi, Omolabake Ibironke Pacheco, Adebayo Oluwatosin Dada, and Adepeju Ayotunde Adeyinka

abstract
Financial markets are highly volatile during crises and regime shifts, challenging the efficacy of traditional static portfolio allocation methods. This study explores whether machine learning (ML) techniques can enhance dynamic asset allocation in volatile U.S. markets. We investigate the adaptability of ML models—such as deep reinforcement learning (DRL), neural networks, and random forest ensembles—in comparison to conventional methods like Markowitz mean-variance and Black-Litterman models. Drawing from recent literature, we highlight how ML strategies can capture nonlinear patterns and adjust in real time to changing market conditions. Our methodology trains ML models on extensive U.S. market data (2007-2022), including equity indices, bonds, and volatility measures. The goal is to maximize risk-adjusted returns while mitigating drawdowns. Empirical results show that ML-based portfolios outperform static benchmarks across key performance metrics. Notably, the DRL agent reduced equity exposure ahead of volatility spikes, achieving higher Sharpe ratios and smaller drawdowns. These findings support the potential of AI-driven strategies to adapt during turbulent periods and generate superior returns. We conclude by discussing the practical implications for investors, the need for robust validation, and future research on integrating explainable AI with financial theory. Overall, ML offers a powerful tool for dynamic portfolio optimization in increasingly uncertain financial environments.