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# Tag Archives: risk fraction

## 2 dimensions of portfolio diversity

Portfolio diversity is a balancing act. Previously The post “Portfolio diversity” talked about the role of the correlation between assets and the portfolio. The current post fills a hole in that post. The 2 dimensions asset-portfolio correlation Each asset in the universe has a correlation with the portfolio. If there are any assets that have … Continue reading

## Linear constraints with risk fractions

A different sort of generalization of variance partitions. Previously The post “Generalizing risk fractions” described additional (to version 1.04 of Portfolio Probe) ways of dividing the variance among the assets. This post describes the other major addition in the new version. Linear constraints Linear constraints on sectors, industries and countries are quite common. These constrain … Continue reading

## Generalizing risk fractions

More ways of constraining the variance attributable to individual assets. Introduction This post describes some additions to the 1.04 version of Portfolio Probe. A beta of that version was released last week. We’ve also added Linux 32-bit and 64-bit as platforms on which Portfolio Probe is for sale. Unfortunately demo and academic versions are still … Continue reading

## Specific differences between Ledoit-Wolf and factor models

What can we learn about the difference in structure between a Ledoit-Wolf variance matrix and a corresponding factor model variance? Previously We’ve generated a set of random portfolios with constraints on the risk fractions of a Ledoit-Wolf variance matrix, and a corresponding set of random portfolios with risk fraction constraints from a statistical factor model. … Continue reading

Posted in Quant finance, R language
Tagged correlations, covariance matrix, Ledoit-Wolf shrinkage, risk fraction, variance matrix
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## Again with Ledoit-Wolf and factor models

We come closer to a definitive answer on the relative merit of Ledoit-Wolf shrinkage versus a statistical factor model for variance matrices. Previously This post builds on the post entitled: A test of Ledoit-Wolf versus a factor model That post depended on some posts previous to it. New information Previously we generated random portfolios with … Continue reading

Posted in Quant finance, R language
Tagged covariance matrix, factor model, Ledoit-Wolf shrinkage, risk fraction, S&P 500, variance matrix
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## A test of Ledoit-Wolf versus a factor model

Statistical factor models and Ledoit-Wolf shrinkage are competing methods for estimating variance matrices of returns. So which is better? This adds a data point for answering that question. Previously There are past blog posts on: the idea of variance matrices factor models of variance The data in this post are from the blog posts: “Weight … Continue reading

Posted in Quant finance, R language
Tagged covariance matrix, factor model, Ledoit-Wolf shrinkage, risk fraction, S&P 500, variance matrix
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## Risk fraction constraints and volatility

What is the effect on predicted and realized volatility of substituting risk fraction constraints for weight constraints? Previously This post depends on two previous blog posts: “Unproxying weight constraints” “Weight compared to risk fraction” The exact same sets of random portfolios are used in this post that were generated in the second of these. Payoff … Continue reading

Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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## Weight compared to risk fraction

How well do asset weight constraints constrain risk? The setup In “Unproxying weight constraints” I claimed that many constraints on asset weights are really a proxy for constraining risk. That is not a problem if weights are a good proxy for risk. So the question is: how good of a proxy are they? To give … Continue reading

Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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## Unproxying weight constraints

It is common practice to have portfolio constraints like: wi ≤ 0.05 That is, the weight of each asset can be no more than 5%. Proxy for risk We think that is what we want to do because we are so used to doing it. But why should we care about the weight of assets? … Continue reading