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An Iterative Approach to Ill-Conditioned Optimal Portfolio Selection
Örebro University, School of Science and Technology.ORCID iD: 0000-0003-0332-2315
Örebro University, Örebro University School of Business.ORCID iD: 0000-0002-1395-9427
2019 (English)Report (Other academic)
Abstract [en]

Covariance matrix of the asset returns plays an important role in the portfolioselection. A number of papers is focused on the case when the covariance matrixis positive definite. In this paper, we consider portfolio selection with a singu-lar covariance matrix. We describe an iterative method based on a second orderdamped dynamical systems that solves the linear rank-deficient problem approxi-mately. Since the solution is not unique, we suggest one numerical solution that canbe chosen from the iterates that balances the size of portfolio and the risk. The nu-merical study confirms that the method has good convergence properties and givesa solution as good as or better than the constrained least norm Moore-Penrose solu-tion. Finally, we complement our result with an empirical study where we analyzea portfolio with actual returns listed in S&P 500 index.

Place, publisher, year, edition, pages
Örebro: Handelshögskolan, Örebro universitet , 2019. , p. 21
Series
Working Papers, School of Business, ISSN 1403-0586 ; 2019:3
Keywords [en]
Mean-variance portfolio, singular covariance matrix, linear ill-posed problems, second order damped dynamical systems
National Category
Probability Theory and Statistics Economics Other Mathematics
Research subject
Statistics; Economics; Mathematics
Identifiers
URN: urn:nbn:se:oru:diva-74364OAI: oai:DiVA.org:oru-74364DiVA, id: diva2:1317369
Available from: 2019-05-22 Created: 2019-05-22 Last updated: 2019-05-29Bibliographically approved

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Gulliksson, MårtenMazur, Stepan

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CiteExportLink to record
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Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf