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Minimum VaR and minimum CvaR optimal portfolios: The case of singular covariance matrix
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
Department of Mathematics, University of Bergen, Bergen, Norway.
2024 (English)Report (Other academic)
Abstract [en]

This paper examines optimal portfolio selection using quantile-based risk measures such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR). We address the case of a singular covariance matrix of asset returns, which leads to an optimization problem with infinitely many solutions. An analytical form for a general solution is derived, along with a unique solution that minimizes the L2-norm. We also show that the general solution reduces to the standard optimal portfolio for VaR and CVaR when the covariance matrix is non-singular.

Place, publisher, year, edition, pages
Örebro: Örebro University School of Business , 2024. , p. 7
Series
Working Papers, School of Business, ISSN 1403-0586 ; 9/2024
Keywords [en]
Minimum VaR portfolio, Minimum CVaR portfolio, Singular covariance matrix, Linear ill-posed problems
National Category
Other Mathematics Economics Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:oru:diva-117174OAI: oai:DiVA.org:oru-117174DiVA, id: diva2:1910361
Available from: 2024-11-04 Created: 2024-11-04 Last updated: 2024-11-05Bibliographically approved

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Gulliksson, MårtenMazur, Stepan

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  • asciidoc
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