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A Method for Portfolio Selection Based on Joint Probability of Co-Movement of Multi-Assets

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Document pages: 14 pages

Abstract: This paper presents a method of portfolio selection for reducing co-relatedrisks. Differing from the Markowitz’s mean-variance framework, we use thejoint probability of co-movement of multi-assets (JPCM) as a measure ofrisks, and under the condition of minimizing the JPCM, we pinpoint the optimalportfolio by optimizing the JPCM matrix of paired assets. At the sametime, we use the shape parameter of generalized error distribution (GED) tomeasure the tail shapes of different portfolios. The empirical results for China’sstock market show that the JPCM portfolios significantly outperformnaive-diversified portfolios (1 N-rule) and minimum-variance (MV) in termsof the tail shape of portfolio distribution.

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