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Portfolio Analysis Using Single Index, Multi-Index, and Constant Correlation Models: A Unified Treatment

Authors

  • CLARENCE C. Y. KWAN

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    • Faculty of Business, McMaster University. The author wishes to thank P. C. Y. Yip for valuable comments and suggestions and W. H. Lo for computational and programming assistance.

ABSTRACT

In this study a simple common algorithm which is applicable to seven models is proposed for optimal portfolio selection disallowing short sales of risky securities. The models considered in the analysis consist of a single index model, four multi-index models, and two constant correlation models. Unlike the previous approach, the proposed algorithm does not require explicit ranking of securities. Therefore, it is particularly useful for two multi-index models with orthogonal indices which do not provide any ranking criterion. Also, because of its algorithmic efficiency as demonstrated in a simulation study on models with multiple groups, the approach here can enhance their usefulness in portfolio analysis.

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