On the optimal allocation of assets in investment portfolio with application of modern portfolio and nonlinear dynamic chaos theories in investment, commercial and central banks

TL;DR

This paper introduces a novel approach to optimize investment portfolios by integrating modern portfolio theory with nonlinear dynamic chaos theories, using bifurcation analysis and Lyapunov stability to enhance asset allocation stability and returns.

Contribution

It proposes the Ledenyov investment portfolio theorem based on Lyapunov stability, combining econophysics and advanced risk management for improved portfolio optimization.

Findings

Bifurcation diagrams provide insights into portfolio stability.

The Ledenyov theorem offers a new stability criterion for asset diversification.

Enhanced expected returns through nonlinear dynamic system analysis.

Abstract

The investment economy is a main characteristic of prosperous society. The investment portfolio management is a main financial problem, which has to be solved by the investment, commercial and central banks with the application of modern portfolio theory in the investment economy. We use the learning analytics together with the integrative creative imperative intelligent conceptual co-lateral adaptive thinking with the purpose to advance our scientific knowledge on the diversified investment portfolio management in the nonlinear dynamic financial system. We apply the econophysics principles and the econometrics methods with the aim to find the solution to the problem of the optimal allocation of assets in the investment portfolio, using the advanced risk management techniques with the efficient frontier modeling in agreement with the modern portfolio theory and using the stability management techniques with the dynamic regimes modeling on the bifurcation diagram in agreement with the dynamic chaos theory. We show that the bifurcation diagram, created with the use of the logistic function in Matlab, can provide some valuable information on the stability of combining risky investments in the investment portfolio, solving the problem of optimization of assets allocation in the investment portfolio. We propose the Ledenyov investment portfolio theorem, based on the Lyapunov stability criteria, with the aim to create the optimized investment portfolio with the uncorrelated diversified assets, which can deliver the increased expected returns to the institutional and private investors in the nonlinear dynamic financial system in the frames of investment economy.