Related papers: The Long Neglected Critically Leveraged Portfolio
Estimation error has plagued quantitative finance since Harry Markowitz launched modern portfolio theory in 1952. Using random matrix theory, we characterize a source of bias in the sample eigenvectors of financial covariance matrices.…
We show that the Markowitz portfolio is a scalar multiple of another portfolio which replaces the covariance with the second moment matrix, via simple application of the Sherman-Morrison identity. Moreover it is shown that when using…
It is shown that the axioms for coherent risk measures imply that whenever there is an asset in a portfolio that dominates the others in a given sample (which happens with finite probability even for large samples), then this portfolio…
The potential benefits of portfolio diversification have been known to investors for a long time. Markowitz (1952) suggested the seminal approach for optimizing the portfolio problem based on finding the weights as budget shares that…
This paper studies a variation of the continuous-time mean-variance portfolio selection where a tracking-error penalization is added to the mean-variance criterion. The tracking error term penalizes the distance between the allocation…
We address a portfolio selection problem that combines active (outperformance) and passive (tracking) objectives using techniques from convex analysis. We assume a general semimartingale market model where the assets' growth rate processes…
We consider a reference security, understood to be an attractive investment, with the caveat that an investor is not willing to directly invest in the security, for presence of constraints, either investor specific or pertaining to the…
For a covariance matrix coming from a factor model of returns, we investigate the relationship between the long-only global minimum variance portfolio and the asset exposures to the factors. In the case of a 1-factor model, we provide a…
In this paper, the mean-variance portfolio selection problem with Poisson jumps are studied, where the recursive utility is given by the solution to a backward stochastic differential equation with Poisson jumps. Both the maximum principle…
Finding an optimal balance between risk and returns in investment portfolios is a central challenge in quantitative finance, often addressed through Markowitz portfolio theory (MPT). While traditional portfolio optimization is carried out…
We characterize the structure and origins of missingness for 159 cross-sectional return predictors and study missing value handling for portfolios constructed using machine learning. Simply imputing with cross-sectional means performs well…
How should financial institutions hedge their balance sheets against interest rate risk when managing long-term assets and liabilities? We address this question by proposing a bond portfolio solution based on ambiguity-averse preferences,…
We study the optimal portfolio allocation problem from a Bayesian perspective using value at risk (VaR) and conditional value at risk (CVaR) as risk measures. By applying the posterior predictive distribution for the future portfolio…
We present the unified market-based description of returns and variances of the trades with shares of a particular security, of the trades with shares of all securities in the market, and of the trades with the market portfolio. We consider…
We analyze a negative-parameter variant of the diversity-weighted portfolio studied by Fernholz, Karatzas, and Kardaras (Finance Stoch 9(1):1-27, 2005), which invests in each company a fraction of wealth inversely proportional to the…
Portfolio optimization methods suffer from a catalogue of known problems, mainly due to the facts that pair correlations of asset returns are unstable, and that extremal risk measures such as maximum drawdown are difficult to predict due to…
The first moment and second central moments of the portfolio return, a.k.a. mean and variance, have been widely employed to assess the expected profit and risk of the portfolio. Investors pursue higher mean and lower variance when designing…
Risk control and optimal diversification constitute a major focus in the finance and insurance industries as well as, more or less consciously, in our everyday life. We present a discussion of the characterization of risks and of the…
The comparative statics of the optimal portfolios across individuals is carried out for a continuous-time complete market model, where the risky assets price process follows a joint geometric Brownian motion with time-dependent and…
A continuous-time Markowitz's mean-variance portfolio selection problem is studied in a market with one stock, one bond, and proportional transaction costs. This is a singular stochastic control problem,inherently in a finite time horizon.…