Stable Linear-Time Optimization in Arbitrage Pricing Theory Models
Risk Magazine, 2016
9 Pages Posted: 12 Aug 2016
Date Written: August 10, 2016
We present an explicit formula for mean-variance optimization in the context of APT models (also called multi-factor models),and related generalizations with trading costs. Our explicit formula has two desirable features: 1. the solutions are well-defined and numerically stable in the presence of approximate or exact colinearity in the design matrix, and 2. the computational complexity is (manifestly) linear with respect to the number of assets.
Keywords: Portfolio Optimization
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