2005/07/01 by Vincenzo Tola, Fabrizio Lillo, Tola, Vincenzo +5 · 4 citations
Business, Management and Accounting · Mathematics · Social Sciences · #Economic and Technological Developments in Russia #Economic and Technological Systems Analysis #FOS: Economics and business #FOS: Physical sciences #Other Condensed Matter (cond-mat.other) #Physics and Society (physics.soc-ph) #Statistical Finance (q-fin.ST) #Statistical and numerical algorithms
paper · pdf · doi:10.48550/arxiv.physics/0507006
openalex publication_date 2005/07/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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.