The econometric approach to algorithmic portfolio securities

Abstract

Purpose: the authors develop an algorithmic procedure for construction the optimal securities portfolio on the basis of linear risk measurement and market interaction of financial assets. Discussion:the authors offer the non-linear form of dependence for market asset profitability on the average market yield. The precursor of this idea is the linear Lintner-Sharp model. The authors suggest to use a binary choice model in this non-linear form for calculate the conditional probabilities of an alternative deviation of an asset’s profitability from its average yield. The authors introduce the concept of market interaction on the basis of profitability alternative representation for financial asset. The authors built the utility function of the portfolio solution with the help of alternative return asset model and the market interaction matrix. Optimization of this utility function for two assets characterizes the algorithmic procedure for build a securities portfolio. Results: the authors got the substantiation of a fairly simple formula for build a portfolio of two securities. The algorithmic procedure provides for the consistent application of this formula, The authors ensure the construction of an optimal portfolio in dependence on the average market yield (index).