Non-linear equity portfolio variance reduction under a mean–variance framework—A delta–gamma approach

To examine the variance reduction from portfolios with both primary and derivative assets we develop a mean–variance Markovitz portfolio management problem. By invoking the delta–gamma approximation we reduce the problem to a well-posed quadratic programming problem. From a practitioner’s perspectiv...

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Bibliographic Details
Published inOperations research letters Vol. 41; no. 6; pp. 694 - 700
Main Authors Jewell, Sean W., Li, Yang, Pirvu, Traian A.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.11.2013
Subjects
Approximation
Derivatives
Mathematical analysis
Mean–variance
Operations research
Portfolios of options
Quadratic programming
Reduction
Variance
Well posed problems
Quadratic programming
Mean–variance
Portfolios of options
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Summary:To examine the variance reduction from portfolios with both primary and derivative assets we develop a mean–variance Markovitz portfolio management problem. By invoking the delta–gamma approximation we reduce the problem to a well-posed quadratic programming problem. From a practitioner’s perspective, the primary goal is to understand the benefits of adding derivative securities to portfolios of primary assets. Our numerical experiments quantify this variance reduction from sample equity portfolios to mixed portfolios (containing both equities and equity derivatives).
Bibliography:ObjectType-Article-1
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ISSN:0167-6377
1872-7468
DOI:10.1016/j.orl.2013.09.013