2001/11/28 by B. Rosenow, B Rosenow, V Plerou +5 · 50 citations
Economics, Econometrics and Finance · Physics and Astronomy · #Asset (computer security) #Complex Systems and Time Series Analysis #Diversification (marketing strategy) #Investment (military) #Investment portfolio #Investment strategy #Portfolio #Portfolio optimization #Stochastic processes and financial applications #Stock (firearms) #Theoretical and Computational Physics #cond-mat.dis-nn #cond-mat.stat-mech #q-fin.PM
paper · pdf · doi:10.1209/epl/i2002-00135-4
published in Europhysics Letters (EPL) 59(4), 500-506 (Institute of Physics) · 12 pages, 4 figures, revtex
arxiv created 2001/11/28 · openalex publication_date 2002/08/01 · arxiv updated 2009/11/30 · openalex created_date 2016/06/24 · openalex updated_date 2026/08/05
Diversification of an investment into independently fluctuating assets reduces its risk. In reality, movement of assets are are mutually correlated and therefore knowledge of cross--correlations among asset price movements are of great importance. Our results support the possibility that the problem of finding an investment in stocks which exposes invested funds to a minimum level of risk is analogous to the problem of finding the magnetization of a random magnet. The interactions for this ``random magnet problem'' are given by the cross-correlation matrix \bf \sf C of stock returns. We find that random matrix theory allows us to make an estimate for \bf \sf C which outperforms the standard estimate in terms of constructing an investment which carries a minimum level of risk.