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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.
2025 (English)In: Results in Applied Mathematics, E-ISSN 2590-0374, Vol. 26, article id 100557Article in journal (Refereed) Published
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 may arise due to potential multicollinearity and strong correlations. This 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 -norm. We show that the general solution reduces to the standard optimal portfolio for VaR and CVaR when the covariance matrix is non-singular. We also provide a brief discussion of the efficient frontier in this context. Finally, we present a real-data example based on the weekly log returns of assets included in the S&P 500 index.

Place, publisher, year, edition, pages
Elsevier, 2025. Vol. 26, article id 100557
Keywords [en]
Minimum VaR portfolio, Minimum CVaR portfolio, Singular covariance matrix, Linear ill-posed problems
National Category
Economics Other Mathematics Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:oru:diva-119802DOI: 10.1016/j.rinam.2025.100557ISI: 001443118700001Scopus ID: 2-s2.0-86000144293OAI: oai:DiVA.org:oru-119802DiVA, id: diva2:1943326
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Örebro UniversityAvailable from: 2025-03-10 Created: 2025-03-10 Last updated: 2026-02-02Bibliographically approved

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Gulliksson, MårtenMazur, Stepan

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CiteExportLink to record
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Citation style
  • apa
  • 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
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Output format
  • html
  • text
  • asciidoc
  • rtf