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Portfolios from Sorts Robert Almgren
 

Summary: Portfolios from Sorts
Robert Almgren
and Neil Chriss
April 26, 2005
Abstract
Modern portfolio theory produces an optimal portfolio from esti-
mates of expected returns and a covariance matrix. We present a
method for portfolio optimization based on replacing expected re-
turns with ordering information, that is, with information about the
order of the expected returns. We give a simple and economically ra-
tional definition of optimal portfolios that extends Markowitz' mean-
variance optimality condition in a natural way; in particular, our
construction allows full use of covariance information. We also pro-
vide efficient numerical algorithms. The formulation we develop is
very general and is easily extended to a variety of cases, for example,
where assets are divided into multiple sectors or there are multiple
sorting criteria available.
University of Toronto, Departments of Mathematics and Computer Science and
Mathematical Finance Program, Robert.Almgren@utoronto.ca
SAC Capital Management, Neil.Chriss@sac.com

  

Source: Almgren, Robert F. - Courant Institute of Mathematical Sciences, New York University

 

Collections: Mathematics