This paper constructs an alternative investment strategy to portfolio optimization model in the framework of the Mean–Variance portfolio selection model. To differentiate it from the ubiquitously applied Mean–Variance model, which is constructed on an assumption that returns are normally...

In this paper we give a resume of the correlation concept that underlies the models for credit risk measurement, for the rating of structured products, for the pricing of (tranches of) structured products, and for Basel II capital charges. We discuss how securitization has changed the risk...

The purpose of this research is the realistic forecast of volatility in frame of a risk parity class of strategies. The custom rescaling of volatility – naïve risk parity - doesn't consider market inefficiencies which correspond to cyclical patterns like crisis and the following recovery. The...

Several risk-return portfolio models take into account practical limitations on the number of assets to include in the portfolio and on their weights. We present here a comparative study, both from the efficiency and from the performance viewpoint, of the Limited Asset Markowitz (LAM), the...

Enhanced Indexation is the problem of selecting a portfolio that should produce excess return with respect to a given benchmark index. In this work we propose a linear bi-objective optimization approach to Enhanced Indexation that maximizes average excess return and minimizes underperformance...

One of the fundamental principles in portfolio selection models is minimization of risk through diversification of the investment. This seems to require that in a given working universe, or market, the investment should be spread among all (or almost all) the available assets. Indeed, this is...

The risk and return characteristics of a highly diversified investment portfolio are examined in an effort to best assess its potential by means that incorporate both conventional risk estimation and performance evaluation. Estimation of performance variability and downside risk often assumes a...

Stock market variance-return or price relations are sometimes negative and sometimes positive. We explain these puzzling findings using a model with two ("bad" and "good") variances. In the model, conditional equity premium depends positively on bad variance and negatively on good variance....

Demonstration that in-sample Markowitz type mean-variance optimization, carried out with noise filtered covariance matrices, results in asset allocation that leads to 2-3 times increase of the Sharpe ratio compared to the same optimization carried out without noise filtering.Demonstration of 2-3...

Demonstration of the omnipresence of noise in volatilities of returns of financial instruments.Demonstration that more than 30% of SP500 securities can have percentage change in volatility of more than 10% as a result of noise filtering.In our white paper “Filtering Noise From Correlation...