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On the weight sign of the global minimum variance portfolio

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  • Chiu, Wan-Yi
  • Jiang, Ching-Hai

Abstract

We investigate the one-to-one mapping between the global minimum variance portfolio and regression hedge coefficients. The analysis demonstrates that assets with a superior (inferior) regression hedged effect in terms of marginal return create a negative (positive) weight. The asset has a weight of zero when both the asset and regression hedge enjoy the same marginal return. In addition, we develop a modified information ratio to compare the magnitudes of two arbitrary weights of the global minimum variance portfolio. From the perspective of hedging, we determine that the asset with a higher modified information ratio yields a larger weight.

Suggested Citation

  • Chiu, Wan-Yi & Jiang, Ching-Hai, 2016. "On the weight sign of the global minimum variance portfolio," Finance Research Letters, Elsevier, vol. 19(C), pages 241-246.
    • Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:241-246
    DOI: 10.1016/j.frl.2016.08.008
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    References listed on IDEAS

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    Cited by:

    1. Dai, Zhifeng & Wen, Fenghua, 2018. "Some improved sparse and stable portfolio optimization problems," Finance Research Letters, Elsevier, vol. 27(C), pages 46-52.
    2. Chiu, Wan-Yi, 2022. "Stepwise expanding the frontier one asset at a time," Finance Research Letters, Elsevier, vol. 46(PA).
    3. Bednarek, Ziemowit & Patel, Pratish, 2018. "Understanding the outperformance of the minimum variance portfolio," Finance Research Letters, Elsevier, vol. 24(C), pages 175-178.

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    More about this item

    Keywords

    Global minimum variance portfolio; Inverse covariance matrix; Regression hedge; Modified information ratio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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