Cluster analysis for portfolio optimization
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Abstract: 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.
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Cited in
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- The Confrontation of Two Clustering Methods in Portfolio Management: Ward’s Method Versus DCA Method
- Clustering high-frequency financial time series based on information theory
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