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Portfolio Analysis with Factors and Scenarios
Author(s) -
MARKOWITZ HARRY M.,
PEROLD ANDRÉF.
Publication year - 1981
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1981.tb04889.x
Subject(s) - portfolio , factor analysis , covariance , covariance matrix , variance (accounting) , factor (programming language) , modern portfolio theory , econometrics , diagonal , computer science , mathematics , statistics , economics , financial economics , programming language , geometry , accounting
Recently there has been a growing interest in the scenario model of covariance as an alternative to the one‐factor or many‐factor models. We show how the covariance matrix resulting from the scenario model can easily be made diagonal by adding new variables linearly related to the amounts invested; note the meanings of these new variables; note how portfolio variance divides itself into “within scenario” and “between scenario” variances; and extend the results to models in which scenarios and factors both appear where factor distributions and effects may or may not be scenario sensitive.