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A Clustering Application in Portfolio Management

  • Jin ZhangEmail author
  • Dietmar Maringer
Chapter
Part of the Lecture Notes in Electrical Engineering book series (LNEE, volume 60)

Abstract

This chapter presents a new asset allocation model which combines a clustering technique with traditional asset allocation methods to improve portfolio Sharpe ratios and portfolio weights stability. The approach identifies optimal clustering patterns in different cluster number cases by using a population-based evolutionary method, namely Differential Evolution. Traditional asset allocations are used to compute the portfolio weights with the clustering. According to the experiment results, it is found that clustering contributes to higher Sharpe ratios and lower portfolio instability than that without clustering. Market practitioners may employ the clustering technique to improve portfolio weights stability and risk-adjusted returns, or for other optimization purposes while distributing the asset weights.

Keywords

Clustering optimization asset allocation sharpe ratio weights instability differential evolution 

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Copyright information

© Springer Science+Business Media B.V. 2010

Authors and Affiliations

  1. 1.Centre for Computational Finance and Economic AgentsUniversity of EssexColchesterUK
  2. 2.Faculty of Economics and Business AdministrationUniversity of BaselBaselSwitzerland

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