Comparing different covariance matrix estimation methods for stock portfolio selectionPublic
Harry Markowitz pioneered Modern Portfolio Theory which suggested that portfolio risk should be quantified by variance. The required elements for this theory are the mean vector for stock returns and the covariance matrix to evaluate risk. Two tests were run on the three methods for estimating the covariance matrix: Sample covariance, single-index, and shrinkage. The shrinkage method performed the best in the Simulated Data test, while the single-index method performed the best in the Moving Window Minimum Variance test.
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