6533b835fe1ef96bd129eaa2
RESEARCH PRODUCT
Cluster analysis for portfolio optimization
Fabrizio LilloFabrizio LilloMauro GallegatiRosario N. MantegnaVincenzo TolaVincenzo Tolasubject
Physics - Physics and SocietyEconomics and EconometricsControl and OptimizationMathematics::Optimization and ControlFOS: Physical sciencesStatistics::Other StatisticsPhysics and Society (physics.soc-ph)random matrix theoryportfolio optimizationcorrelation matriceRate of return on a portfolioFOS: Economics and businessComputer Science::Computational Engineering Finance and ScienceEconometricsEconomicsCluster analysisModern portfolio theoryStatistical Finance (q-fin.ST)Covariance matrixApplied MathematicsQuantitative Finance - Statistical FinanceCondensed Matter - Other Condensed MatterPortfolioPortfolio optimizationVolatility (finance)clustering methodRandom matrixOther Condensed Matter (cond-mat.other)description
We consider the problem of the statistical uncertainty of the correlation matrix in the optimization of a financial portfolio. We show that the use of clustering algorithms can improve the reliability of the portfolio in terms of the ratio between predicted and realized risk. Bootstrap analysis indicates that this improvement is obtained in a wide range of the parameters N (number of assets) and T (investment horizon). The predicted and realized risk level and the relative portfolio composition of the selected portfolio for a given value of the portfolio return are also investigated for each considered filtering method.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2005-07-01 |