ProV Logo
0
Optimal Allocation of Trend Following St...
Grebenkov, Denis S....

Free

Optimal Allocation of Trend Following Strategies by Grebenkov, Denis S. ( Author )
Lemonjar Open Access
N.A
30-10-2014
We consider a portfolio allocation problem for trend following (TF) strategies on multiple correlated assets. Under simplifying assumptions of a Gaussian market and linear TF strategies, we derive analytical formulas for the mean and variance of the portfolio return. We construct then the optimal portfolio that maximizes risk-adjusted return by accounting for inter-asset correlations. The dynamic allocation problem for n assets is shown to be equivalent to the classical static allocation problem for n2 virtual assets that include lead-lag corrections in positions of TF strategies. The respective roles of asset auto-correlations and inter-asset correlations are investigated in depth for the two-asset case and a sector model. In contrast to the principle of diversification suggesting to treat uncorrelated assets, we show that inter-asset correlations allow one to estimate apparent trends more reliably and to adjust the TF positions more efficiently. If properly accounted for, inter-asset correlations are not deteriorative but beneficial for portfolio management that can open new profit opportunities for trend followers.
-
Article
pdf
36.88 KB
English
-
MYR 0.01
-
https://arxiv.org/abs/1410.8409
Share this eBook