Quantitative Investment Diversification Strategies via Various Risk Models

ArXiv ID: 2407.01550 “View on arXiv”

Authors: Unknown

Abstract

This paper focuses on the developing of high-dimensional risk models to construct portfolios of securities in the US stock exchange. Investors seek to gain the highest profits and lowest risk in capital markets. We have developed various risk models and for each model different investment strategies are tested. Out of sample tests are performed on a long-term horizon from 1970 until 2023.

Keywords: High-dimensional Risk Models, Portfolio Construction, Out-of-sample Testing, US Stocks, Investment Strategies, Equities

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 9.0/10
• Quadrant: Holy Grail
• Why: The paper employs advanced mathematical models with multiple covariance estimators and complex optimization formulations (e.g., risk parity with logarithmic objectives), indicating high mathematical sophistication. It demonstrates high empirical rigor through detailed backtesting on real CRSP data over a 50+ year horizon, using multiple performance metrics, out-of-sample testing, and implementation details like specific optimization solvers.

  flowchart TD
    A["Research Goal: Construct Optimal Portfolios<br>via High-Dimensional Risk Models"] --> B["Data: US Stocks 1970-2023"]
    B --> C["Develop Risk Models<br>Factor Models & Covariance Estimators"]
    C --> D["Define Strategies<br>Long-Short & Optimization"]
    D --> E["Out-of-Sample Testing<br>1970-2023 Horizon"]
    E --> F["Key Outcomes:<br>Performance & Risk Metrics"]
    F --> G["Conclusion:<br>Model Efficacy for US Equities"]