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The Journal of Portfolio Management

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Article

Extreme Correlations and Optimizing for Stress

Wesley Phoa
The Journal of Portfolio Management Winter 2015, 41 (2) 71-75; DOI: https://doi.org/10.3905/jpm.2015.41.2.071
Wesley Phoa
is senior vice president of The Capital Group Companies in Los Angeles, CA. wkp@capgroup.com
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Abstract

Asset correlations often change significantly during periods of financial market dislocation. This article describes a rigorous way of deriving a covariance matrix for use in stressed market environments. This lets investors apply standard mean–variance techniques to analyze investment strategy under extreme conditions. Applications include risk management and constructing optimally defensive portfolios for stressed markets. The method is based on recent advances in multivariate extreme-value theory.

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The Journal of Portfolio Management: 41 (2)
The Journal of Portfolio Management
Vol. 41, Issue 2
Winter 2015
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Extreme Correlations and Optimizing for Stress
Wesley Phoa
The Journal of Portfolio Management Jan 2015, 41 (2) 71-75; DOI: 10.3905/jpm.2015.41.2.071

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Extreme Correlations and Optimizing for Stress
Wesley Phoa
The Journal of Portfolio Management Jan 2015, 41 (2) 71-75; DOI: 10.3905/jpm.2015.41.2.071
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  • Article
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    • MULTIVARIATE EXTREMES AND OUTER COVARIANCES
    • DEFENSIVE PORTFOLIOS FOR STRESSED ENVIRONMENTS
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