Stable Linear-Time Optimization in Arbitrage Pricing Theory Models

Risk Magazine, 2016

9 Pages Posted: 12 Aug 2016

See all articles by Gordon Ritter

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences; City University of New York (CUNY) - Weissman School of Arts and Sciences; Rutgers, The State University of New Jersey - Financial Statistics & Risk Management; New York University (NYU) - NYU Tandon School of Engineering

Date Written: August 10, 2016

Abstract

We present an explicit formula for mean-variance optimization in the context of APT models (also called multi-factor models),and related generalizations with trading costs. Our explicit formula has two desirable features: 1. the solutions are well-defined and numerically stable in the presence of approximate or exact colinearity in the design matrix, and 2. the computational complexity is (manifestly) linear with respect to the number of assets.

Keywords: Portfolio Optimization

Suggested Citation

Ritter, Gordon, Stable Linear-Time Optimization in Arbitrage Pricing Theory Models (August 10, 2016). Risk Magazine, 2016, Available at SSRN: https://ssrn.com/abstract=2821360

Gordon Ritter (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

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