On Using Statistical Factor Models in Optimizing Long-Only Portfolios

10 Pages Posted: 25 Sep 2003

Date Written: May 6, 2003

Abstract

Realized tracking errors are examined for a series of optimized portfolios using various estimates for the variance matrix. It is clear that the benchmark should be added mathematically to the variance matrix using the constituent weights - this dramatically outperforms the case where the benchmark is a separate asset in the return matrix or where relative returns are used. The common belief that factor models are to be preferred to sample variance estimates is confirmed, but only on condition that the benchmark is added mathematically to the variance matrix.

Suggested Citation

Burns, Patrick J., On Using Statistical Factor Models in Optimizing Long-Only Portfolios (May 6, 2003). Available at SSRN: https://ssrn.com/abstract=443520 or http://dx.doi.org/10.2139/ssrn.443520

Patrick J. Burns (Contact Author)

Burns Statistics ( email )

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London E3 2LA
United Kingdom
+44 0 20 8525 0696 (Phone)

HOME PAGE: http://www.burns-stat.com

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