To reduce risk, investors seek assets that have high expected return and are unlikely to move in tandem. Correlation measures are generally used to quantify the connections between equities. The 2008 financial crisis, and its aftermath, demonstrated the need for a better way to quantify these connections. We present a machine learning-based method to build a connectedness matrix to address the shortcomings of correlation in capturing events such as large losses. Our method uses an unconstrained optimization to learn this matrix, while ensuring that the resulting matrix is positive semi-definite. We show that this matrix can be used to build portfolios that not only “beat the market,” but also outperform optimal (i.e., minimum variance) portfolios.

Professional sports is a roughly $500 billion dollar industry that is increasingly data-driven. In this paper we show how machine learning can be applied to generate a model that could lead to better on-field decisions by managers of professional baseball teams. Specifically we show how to use regularized linear regression to learn pitcher-specific predictive models that can be used to help decide when a starting pitcher should be replaced. A key step in the process is our method of converting categorical variables (e.g., the venue in which a game is played) into continuous variables suitable for the regression. Another key step is dealing with situations in which there is an insufficient amount of data to compute measures such as the effectiveness of a pitcher against specific batters.