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A Statistical Analysis of Weighting Techniques for Portfolio Construction: Insights for Portfolio Managers and Investors
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Statistics.
2023 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

This thesis investigates the relative merits and drawbacks of six portfolio weighting techniques, including two traditional (equal and value-weighting), two optimization-based (mean-variance and risk parity), and two statistical (principal component analysis and ridge regression) techniques. The focus is thus on selecting the weighting technique, an aspect of portfolio construction that market practitioners sometimes overlook. The analysis, implemented on the Swedish market, employs historical backtesting, Monte Carlo simulations, and stress tests to evaluate various techniques under diverse market conditions. The results reveal that no single portfolio consistently outperforms or underperforms across all metrics and scenarios, highlighting the importance of a comprehensive set of performance and risk measures for informed investment decisions. Furthermore, the statistical techniques, principal component analysis and ridge regression demonstrate competitive risk-adjusted returns relative to the traditional and optimization-based techniques implemented in this thesis. The results suggest that market practitioners should consider incorporating these somewhat uncommon techniques alongside more traditional techniques in portfolio management, depending on their investment objectives and risk tolerance.

Place, publisher, year, edition, pages
2023. , p. 42
National Category
Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:uu:diva-504775OAI: oai:DiVA.org:uu-504775DiVA, id: diva2:1768567
Subject / course
Statistics
Educational program
Master Programme in Statistics
Supervisors
Examiners
Available from: 2023-06-16 Created: 2023-06-15 Last updated: 2023-06-16Bibliographically approved

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CiteExportLink to record
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