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Comparing different covariance matrix estimation methods for stock portfolio selection Public

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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.

  • This report represents the work of one or more WPI undergraduate students submitted to the faculty as evidence of completion of a degree requirement. WPI routinely publishes these reports on its website without editorial or peer review.
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  • 04E019M
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  • 2004
Date created
  • 2004-01-01
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