Non-linear mixture of asset return models
Non-linear mixture of asset return models
When quantitatively determining a portfolio’s asset allocation, a blend of different models’ outputs can be used. Traditional subjective expected utility (SEU) methods do so linearly, and as such cannot capture non-linear strategies used to guard against the uncertainty over how accurately a model reflects the real-world distribution. For instance, it may be desirable to cap possible allocations to guard against models excessively overweighting a given asset, or to penalise the outliers when
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