Application of noise level estimation for portfolio optimization

Abstract

Summary. Time changes of noise level at Warsaw Stock Market are analyzed using a recently developed method basing on properties of the coarse grained entropy. The condition of the minimal noise level is used to build an efficient portfolio. Our noise level approach seems to be a much better tool for risk estimations than standard volatility parameters. Implementation of a corresponding threshold investment strategy gives positive returns for historical data.pacs 05.45. Tp,89.65

Risk evaluation with enhanced covariance matrix

“…Optimization of portfolios has been much studied since the pioneering work of Markowitz [1,2], who proposed using the mean-variance as a route to portfolio optimization [1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16]. However the basic construction of the portfolio has not changed much as a result.…”