Questions tagged [mean-variance]

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41 views

Is non-linear correlation an issue in portfolio optimization?

Portfolio weights are linear combinations of assets. How can it be true then for there to be, and how can someone prove that there is any, non-linear correlation issues in portfolio optimization? Is ...
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1answer
171 views

Methods for superior estimates of returns in m.v. portfolio optimization

Leaving aside the aspects related to the estimation of the variance component (all the latest techniques to compute a stable covariance matrix of a given set of assets such as simple shrinkage, Ledoit-...
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115 views

James-Stein estimator for superior estimates of returns in m.v. portfolio optimization

I am currently learning about statistical techniques to enhance the estimation of input parameters in a m.v. optimization. Specifically I have some doubts about the James-Stein estimator applied as an ...
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3answers
111 views

Are mean-variance efficient portfolio weights random variables with probability distributions?

The mean-variance model outputs a portfolio weight vector whose elements are individual asset weights that sum to 1. Regardless of which portfolio along the efficient frontier is being solved, the ...
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1answer
240 views

Quasi Random Monte Carlo in m.v. portfolio optimization

Not specifying a correlation matrix for the Monte Carlo Simulation's random returns is equivalent to assuming no correlation or a correlation coefficient of zero, which will seriously and adversely ...
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3answers
256 views

Any portfolio models not based on asset return moments?

The mean-variance model for portfolio optimization minimizes portfolio risk (covariance matrix), which is the second statistical moment of multivariate asset returns, and sometimes simultaneously ...
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2answers
151 views

What does the concept “standard Markowitz approach” include?

Does "standard Markowitz approach" include only mean-variance approach or does it also include other approach such as minimum-variance approach?
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34 views

Selecting the best characteristic portfolio per rebalance date

An investor typically decides a portfolio objective and sticks with that objective for every rebalance date in the portfolio's life. Common characteristic portfolios that the investor chooses are: ...
3
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1answer
89 views

Ledoit/Wolf covariance shrinkage in risk-parity optimisation

This is more of a theoretical question. I have been working on some mean-variance / Black-Litterman models and played around with Ledoit/Wolf's covariance shrinkage method (sklearn function in Python)....
3
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1answer
111 views

Do normal returns make the mean-variance portfolio model perform properly?

The Markowitz mean-variance model is known to suffer from estimation error due to financial returns not meeting the assumptions of a normal distribution, providing portfolio weights that underperform ...
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284 views

Mean Variance Optimization of 2000 pairs of securities (Python)

I would like to take the opportunity to ask for your help on an assignment I'm trying to complete. For this 'Modern Robo Advisory' course we are asked to solve a (target) goal-based investment ...
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3answers
471 views

Any portfolio theories not based on asset returns?

For data, the mean-variance model for portfolio optimization uses asset returns to minimize portfolio risk (covariance matrix), which is asset returns volatility, and sometimes simultaneously ...
1
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1answer
59 views

How do i find the covariance between two portfolios?

I know that the formula for covariance is But this is for two securities. How do I find the covariance between two portfolios? more specifically between the global minimum variance (GMV) and the mean-...
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1answer
207 views

Leverage constraints

I am trying to complete my project on Mean-Variance Leverage Optimization, and I have found lots of helpful advice on this forum. I wanted to ask you if you have some idea on how to implement a ...
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19 views

Risk aversion coefficients for multi objective quadratic programming

I am solving different quadratic programming optimizations in a setting that involves the usual mean variance problem plus other objectives. My concern is how to choose the many so-called risk ...
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1answer
58 views

Is this methodology for finding the minimum variance portfolio with no short-selling sound?

I have below here an excerpt from a book on (among other things) mean-variance analysis showing how to find the minimum variance portfolio (Risk and Portfolio Analysis: Principles and Methods, by Hult,...
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45 views

Mean variance portfolio - alternative formulations

From this lecture on YouTube the lecturer states that there are three ways to form the mean variance portfolio (minimize variance for a given return, maximize return for a given variance, maximize a "...
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1answer
93 views

Sign retention in mean variance optimization

The mean variance optimization to the objective: $h^T\alpha - \lambda h^T V h$ results in the solution: $h = \frac{V^{-1} \alpha}{2 \lambda}$ Would a positive value for an asset in $\alpha$ result ...
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1answer
84 views

Mean-Variance optimization with no short selling

I am wondering how I can find the vector of Lagrange multipliers $\mu$ for the non-negativity constraint of the following problem: $$ L(w,\lambda, \mu) = w^{T}\Sigma w - \lambda(w -1) + \mu w $$ So ...
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26 views

Calculating R* in a two-asset world

In chapter 5 of John Cochrane's Asset pricing, we derive a state-space interpretation of the mean variance frontier by defining $R^*$ and $R^{e*}$. A little forward, we have this formulation: $$R^* = \...
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225 views

How good is the inverse-volatility portfolio?

Heuristic portfolio construction techniques include the equally-weighted portfolio (1/N) and the inverse volatility portfolio (IVP), which is based on the low-volatility effect. They can be assembled ...
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1answer
474 views

Can a capital market line have a negative slope?

I am struggling to interpret my mean-variance / efficient frontier / capital market line results. I have no issues calculating the efficient frontier. However, I do increase the risk-free rate from ...
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1answer
83 views

How to stress test a correlation matrix

As part of a mean variance portfolio task, I am calculating portfolio risk and optimal allocations between assets given required level of return. Input: expected returns, volatility and correlation ...
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1answer
66 views

What if all the weights are negative in mean-variance optimization during a crisis?

Usually the constraint is that all weights sum up to 1. But in a crisis when all assets are falling in prices, intuitively, all the weights should be negative in the optimization. But it contradicts ...
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88 views

Finding the Efficient Frontier in Tensorflow

I have two assets A and B. Asset A has an expected return of 0.92% with a standard deviation of 2.10. Asset B has an expected return of 1.39% and a standard deviation of 2.20. I want to find the set ...
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1answer
121 views

Fixes of quadratic utility when probability of decreasing utility is large

In finance and specifically portfolio theory, a popular utility function is quadratic utility $$ u(x)=x-\frac{\lambda}{2}(x-\mu_X)^2 $$ where $x$ is wealth and $\lambda$ is the parameter of risk ...
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36 views

How to obtain tangency portfolio of the resampled efficient frontier in MATLAB?

I have generated the resampled frontier according to Michaud's approach. In order to compare it with the classical mean variance approach I want to invest in the respective tangency portfolios. While ...
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1answer
46 views

Surface plots of the mean-variance efficient frontier

3d surface plots contain an X, Y and Z axis. For the mean-variance efficient frontier: X axis is portfolio volatility ($\sigma_p$) Y axis is portfolio expected return ($\mu_p$) any ideas for what ...
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66 views

Mean Semivariance Optimization VS PMPT

Mean Semivariance optimization defines semivariance, variance only below the benchmark/required rate of return, as: $(1/T).\sum_{t=1}^{T} [Min(R_{it}-B,0)]^2$ where $B$ is the benchmark rate, $R_{i}$...
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6answers
254 views

Is a more robust Covariance estimation possible?

I'm working on a mean-variance optimization problem, but instead of financial securities I'm choosing a 'portfolio' of N athletes. It is a 1-period optimization problem over one generic statistic ...
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42 views

Notation for the variance in papers

Here is a screenshot from : LIM Quadratic hedging and mean variance portfolio selection with random parameters in an incomplete market When I deal with mean variance portfolios, I usually see the ...
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1answer
50 views

ARMA moments proof

Consider a standard ARMA(1,1) process such as $$x_t - \beta x_{t-1} = \theta u_{t-1} + u_t$$ where $u_t$ is i.i.d. $u_t \sim N(0,\sigma^2)$. I know how to derive mean and variance with stationary ...
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1answer
91 views

Prove that the portfolio that maximizes utility lies on the efficient frontier

When maximizing mean-variance utility in a portfolio optimization framework $max \{R - \lambda \sigma ^2\}$ where R is portfolio return, $\lambda$ is a risk aversion parameter, and $\sigma^2$ is ...
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52 views

Stochastic discount factor for factor research

Often, after presenting a new factor technique, the paper calculates an SDF by doing $\Sigma ^{-1}\mu_F$ i.e. mean variance optimization on the factors. What is the significance of doing this ?
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77 views

Can variance change over time?

I'm working on a toy project that involves fantasy basketball, I know this is the quantitative finance stackexchange, but it seemed like the best place to ask this question. My goal is to make ...
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1answer
320 views

Monte Carlo (resampling) in m.v. portfolio optimization

The instability and high sensitivity of optimisation results can be augmented by adding another layer of quantitative methodology in the form of Monte Carlo Simulation. The name Monte Carlo alludes to ...
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50 views

Mean Variance Optimization vs Risk Scaling

What would be the difference between the following. Both techniques will result is an ex-ante risk of $\sigma$. However, that would be achieved via two different values of h. I want to understand ...
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40 views

Tangency portfolio with two additional constraints

I know that the formula for determining the weights of the Tangency portfolio is given as $w_{tan}$ = $\frac{\Sigma \mu}{\iota^{\prime}\Sigma\mu }$, but I was wondering how to derive the weights in ...
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2answers
10k views

Typical risk aversion parameter value for mean-variance optimization?

What are typical values for risk aversion parameters $\lambda$ used in mean-variance optimization? Please provide references. Just to be clear, I'm talking about the $\lambda$ in $U(w) = w'\mu - \...
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2answers
120 views

Multi-period portfolio allocation: Time-inconsistent approach

Consider a multi-period mean-variance portfolio optimization so that at time $t$ I find the strategy that maximizes my expected terminal wealth $X_T$, subject to a constraint on risk, \begin{align*} \...
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4answers
6k views

Markowitz mean-variance optimization as “error maximization”

I hear it said a lot that standard MV optimization "maximizes errors". But I can't find a good explanation for what exactly they mean by this "maximization" of estimation error. I understand that if ...
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0answers
164 views

In sample and out of sample in Mean Variance Optimization

Hello to everyone and thanks again for your help, i have find this forum really helpful while working on my final dissertation. However I'm here again because I have loads of doubts regarding the in-...
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42 views

Standard Deviation: Probablity analysis [closed]

Stock E has an average return of 13.6% and a standard deviation of 9%, what is the probability that Stock E will return less than -4.4%
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1answer
866 views

Portfolios from Sorts

Some time ago Almgren and Chriss proposed a method for portfolio optimization based on sorting criteria such as $r_1 > r_2 >... > r_N$ instead of explicit expected returns: see portfolios ...
5
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1answer
108 views

Risk/Return Paradox in Markowitz Optimization?

It is possible that from the efficient frontier obtained varying the "lambda" parameter of the risk-appetite coefficient, in the Mean Variance Parametric Quadratic programming problem, it results that ...
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2answers
111 views

Extend mean-variance optimisation to fama five factor

I'm new to quant finance, and as I'm not a mathematician, I am using python to try an understand it. There are a number of blogs on the internet which explain mean variance optimisation, but no-one ...
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1answer
132 views

Mean-variance maximization

I denote by $W_0$ and $W_1$ the wealth of an investor at $t=0$ and $t=1$, respectively. Let $r_f$ be the risk free rate, $r$ the vector of returns of the risky assets in excess of the risk free rate, ...
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3answers
760 views

Efficient frontier doesn't look good

Hi I'm trying to draw an efficient frontier. Below is what I used. returns parameter consists of 9 column returns of portfolio. I selected 10,000 portfolios and this is how my efficient frontier ...
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1answer
65 views

Mean Variance optimization on hourly data with gaps

I'm building a mean variance optimizer for a portfolio of FX, commodity and bond futures. The input data is hourly returns for each underlying. Given each underlying has different market opening hours,...
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2answers
2k views

mean variance optimization vs max sharpe ratio

I keep reading/hearing that the results from mean-var optimization is max Sharpe ratio. It seems making sense if you fix either target return or target risk, but in general, it doesn't seems right, ...