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SUMMARY:Optimal Asset Allocation with Factor Models for Large Portfolios -
  Paolo Zaffaroni\, Imperial College London
DTSTART:20080610T160000Z
DTEND:20080610T170000Z
UID:TALK11987@talks.cam.ac.uk
CONTACT:Eva Gottschalk
DESCRIPTION:This paper characterizes the asymptotic behaviour\, as the num
 ber of assets gets arbitrarily large\, of the portfolio weights for the cl
 ass of tangency portfolios belonging to the Markowitz paradigm. It is assu
 med that the joint distribution of asset returns is characterized by a gen
 eral factor model\, with possibly heteroskedastic components. Under these 
 conditions\, we establish that a set of appealing properties\, so far unno
 ticed\, characterize traditional Markowitz portfolio trading strategies. F
 irst\, we show that the tangency portfolios fully diversify the risk assoc
 iated with the factor component of asset return innovations. Second\, with
  respect to determination of the portfolio weights\, the conditional distr
 ibution of the factors is of second-order importance as compared to the di
 stribution of the factor loadings and that of the idiosyncratic components
 . Third\, although of crucial importance in forecasting asset returns\, cu
 rrent and lagged factors do not enter the limit portfolio returns. Our the
 oretical results also shed light on a number of issues discussed in the li
 terature regarding the limiting properties of portfolio weights such as th
 e diversifiability property and the number of dominant factors.
LOCATION:Winstanley Lecture Hall\, Trinity College
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