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How does one apply modern portfolio theory to optimize the allocation of a portfolio of interest rate derivatives?

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  • $\begingroup$ MPT may not be the right tool for this. Because of non-normality and non-linearity. $\endgroup$ – noob2 Aug 17 '18 at 13:49
  • $\begingroup$ @noob2 so what tool to use? $\endgroup$ – John Doe Aug 17 '18 at 13:49
  • $\begingroup$ Might depend on who holds this portfolio (derivs dealer, bank, pension fund), purpose of portfolio (hedging, speculation) and other info. Also what do you mean by optimized, optimized with respect to what. Without more info about problem your question frankly a bit airy-fairy. $\endgroup$ – noob2 Aug 17 '18 at 16:10
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    $\begingroup$ Perhaps a starting point is to think about your objective? Classic portfolio theory cares only about mean and variance, but you can have preferences that penalize higher kurtosis etc.... $\endgroup$ – Matthew Gunn Aug 17 '18 at 17:06

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