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An Empirical Study of Statistical Financial Models: Portfolio Optimization and Evaluation

  • Author(s): Fan, Weikang
  • Advisor(s): Handcock, Mark S.
  • et al.
Abstract

This paper provides a review of statistical models in finance for portfolio optimization and portfolio performance evaluation. Based on the assumptions of modern portfolio theory, we discuss five portfolio optimizing models. We then classify portfolio performance evaluation measures into four generalized categories, including the most common performance/risk ratios, the incremental return, the preference-based measures, and the market timing measures. Under each category we review the typical measures with their advantages and drawbacks, and discuss approaches to refine on the drawbacks.

In the empirical study section that follows we build five portfolios based on the portfolio optimizing models. Eleven performance evaluation measures are applied to the portfolios, and are compared according to their effectiveness.

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