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Defining asset classes from a quantitative perspective is an interesting question that is not really addressed "officially" as far as I know. Let's try to write some requirements you want strategic decisions to make sense: each asset class should have at least one or two different "economic drivers" than the others you want tactical ...


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This turns out to be a general drawback of the HRP algorithm, as pointed out by Pfitzinger, J., & Katzke, N. (2019) (my highlights): As shown in Figure 2.3, the naive bisection rule can violate the intuitive character of the result, by placing similar assets into separate clusters for allocation purposes. While centered bisection yields a symmetric ...


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The CEV model has closed form solutions. See for example Schorder's paper. Models are typically calibrated to vanilla equity or equity index options, and not to historical data. So you can use the closed-form solution of the CEV model to fit it to vannilla options data. As these exhibit skew, the $\gamma$ will probably be less than 1. In my experience, for ...


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Yes, indeed. It's a simple Linear Algebra and Expectation result: Given: $Var(w'r) = \mathbb{E}[(w'r)^2] = \mathbb{E}[(w'rr'w)]$ With $w$ and $r$ the vectors of weights and returns. As $w$ is constant, it holds: $\mathbb{E}[w'rr'w] = w'\mathbb{E}[rr']w$ The sample variance, $\hat{\Sigma}$, is a estimator of for $\mathbb{E}[rr']$. Therefore, it holds what you ...


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A quant technique that could be used to (partially) address this problem is the Mean Variance Spanning Test of Huberman and Kandel (1987). Abstract This is a statistical test of whether adding K new assets to an existing set of N assets improves the Efficient Frontier or not. Roughly speaking the test involves checking whether the new assets "add ...


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