The Errors-in-Variable Model in the Optimal Portfolio Construction
Journal Title: Decision Making in Manufacturing and Services - Year 2007, Vol 1, Issue 1
Abstract
In the paper we consider a modification of Sharpe’s method used in classical portfolio analysis for optimal portfolio building. The conventional theory assumes there is a linear relationship between asset’s return and market portfolio return, while the influence of all the other factors is not included. We propose not to neglect them any more, but include them into a model. Since the factors in question are often hard to measure or even characterize, we treat them as a disturbances on random variables used by classical Sharpe’s method. The key idea of the paper is the modification of the classical approach by application of the errors-in-variable model. We assume that both independent (market portfolio return) as well as dependent (given asset’s return) variables are randomly distributed values related with each other by linear relationship and we build the model used for parameters’ estimation. To verify the model, we performed an analysis based on archival data from Warsaw Stock Exchange. The results are also included.
Authors and Affiliations
Anna Czapkiewicz, Małgorzata Machowska
Keywords
Related Articles
- EP ID EP422721
- DOI 10.7494/dmms.2007.1.2.49
- Views 94
- Downloads 0
Balancing Bilinearly Interfering Elements
Many decisions in various fields of application have to take into account the joined effects of two elements that can interfere with each other. This happens for example in Medicine (synergic or antagonistic drugs ), in...
Scheduling Problems with Learning and Ageing Effects: A Survey
In recent years, many papers concerning scheduling problems with simultaneous learning and ageing effects were published. In this paper, the state of the art of research concerning these problems is presented. In order t...
On the Non-Symmetric Nash and Kalai-Smorodinsky Bargaining Solutions
Recently in some negotiation application areas the usual assumption that the negotiators are symmetric has been relaxed. In particular, weights have been introduced to the Nash Bargaining Solution to reflect the differe...
A Loss Function for Box-Constrained Inverses Problems
A loss function is proposed for solving box-constrained inverse problems. Given causality mechanisms between inputs and outputs as smooth functions, an inverse problem demands to adjust the input levels to make the outpu...
Extended Model Formulation of the Proportional Lot-Sizing and Scheduling Problem with Lost Demand Costs
We consider mixed-integer linear programming (MIP) models of production planning problems known as the small bucket lot-sizing and scheduling problems. We present an application of a class of valid inequalities to the ca...