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The Journal of Portfolio Management

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Primary Article

Shrinking the Covariance Matrix

David J. Disatnik and Simon Benninga
The Journal of Portfolio Management Summer 2007, 33 (4) 55-63; DOI: https://doi.org/10.3905/jpm.2007.690606
David J. Disatnik
A Ph.D. student in finance in the Faculty of Management at Tel Aviv University in Israel.
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  • For correspondence: daveydis@post.tau.ac.il
Simon Benninga
A professor of finance in the Faculty of Management at Tel Aviv University in Israel.
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  • For correspondence: benninga@post.tau.ac.il
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Abstract

The subject here is construction of the covariance matrix for portfolio optimization. In terms of the ex post standard deviation of the global minimum-variance portfolio, there is no statistically significant gain in using more sophisticated shrinkage estimators rather than simpler portfolios of estimators. This finding holds whether or not the investor imposes short sale constraints to prevent portfolio weights from being negative.

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The Journal of Portfolio Management
Vol. 33, Issue 4
Summer 2007
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Shrinking the Covariance Matrix
David J. Disatnik, Simon Benninga
The Journal of Portfolio Management Jul 2007, 33 (4) 55-63; DOI: 10.3905/jpm.2007.690606

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Shrinking the Covariance Matrix
David J. Disatnik, Simon Benninga
The Journal of Portfolio Management Jul 2007, 33 (4) 55-63; DOI: 10.3905/jpm.2007.690606
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