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Hierarchical Minimum Variance Portfolios: A Theoretical and Algorithmic Approach

Hierarchical Minimum Variance Portfolios: A Theoretical and Algorithmic Approach

来源:Arxiv_logoArxiv
英文摘要

We introduce a novel approach to portfolio optimization that leverages hierarchical graph structures and the Schur complement method to systematically reduce computational complexity while preserving full covariance information. Inspired by Lopez de Prados hierarchical risk parity and Cottons Schur complement methods, our framework models the covariance matrix as an adjacency-like structure of a hierarchical graph. We demonstrate that portfolio optimization can be recursively reduced across hierarchical levels, allowing optimal weights to be computed efficiently by inverting only small submatrices regardless of portfolio size. Moreover, we translate our results into a recursive algorithm that constructs optimal portfolio allocations. Our results reveal a transparent and mathematically rigorous connection between classical Markowitz mean-variance optimization, hierarchical clustering, and the Schur complement method.

Gamal Mograby

财政、金融

Gamal Mograby.Hierarchical Minimum Variance Portfolios: A Theoretical and Algorithmic Approach[EB/OL].(2025-03-15)[2025-05-05].https://arxiv.org/abs/2503.12328.点此复制

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