M this le denes all the needed data and also plots

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Unformatted text preview: er). ++ The return covariance has the factor form Σ = F QF T + D, where F ∈ Rn×k (with rank K ) is the factor loading matrix, Q ∈ Sk is the factor covariance matrix, and D is a diagonal matrix ++ with positive entries, called the idiosyncratic risk (since it describes the risk of each asset that is independent of the factors). This form for Σ is referred to as a ‘k -factor risk model’. Some typical dimensions are n = 2500 (assets) and k = 30 (factors). (a) What is the flop count for computing the optimal portfolio, if the low-rank plus diagonal structure of Σ is not exploited? You can assume that λ = 1 (which can be arranged by absorbing it into Σ). (b) Explain how to compute the optimal portfolio more efficiently, and give the flop count for your method. You can assume that k ≪ n. You do not have to give the best method; any method that has linear complexity in n is fine. You can assume that λ = 1. Hints. You may want to introduce a new variable y = F T w (which is called the vector of factor exposures). You may want to work with the matrix G=...
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