We compared risk-efficient portfolios with cap-weighted and equal-weighted portfolios of liquid large-cap stocks from 1960 through 2019. We also take steps to limit turnover and tax consequences by trading overlapping monthly portfolios with annual holding periods.
We’ve spent a great deal of time in past articles discussing the merits of portfolio optimization. In this article we will examine the merits and challenges of portfolio optimization in the context of one of the most challenging investment universes: managed futures.
Our whitepaper “The Optimization Machine: A General Framework for Portfolio Choice” presented a logical framework for thinking about portfolio optimization given specific assumptions regarding expected relationships between risk and return. We explored the fundamental roots of common portfolio …
It is widely accepted among investment professionals that, while portfolio optimization has compelling theoretical merit, it is not useful in practice. Practitioners are concerned that optimization is an “error maximizing” ¹ process fraught with insurmountable estimation issues.
This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry.
ReSolve Asset Management Blog is an investment research forum, opinion pieces, and educational material from the team at ReSolve Asset Management. Our views are driven by evidence based finance, with a special focus on asset allocation, factors and smart beta, retirement and endowment strategies, and quantitative methods.
