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Seven Sins in Portfolio Optimization

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  • Thomas Schmelzer
  • Raphael Hauser

Abstract

Although modern portfolio theory has been in existence for over 60 years, fund managers often struggle to get its models to produce reliable portfolio allocations without strongly constraining the decision vector by tight bands of strategic allocation targets. The two main root causes to this problem are inadequate parameter estimation and numerical artifacts. When both obstacles are overcome, portfolio models yield excellent allocations. In this paper, which is primarily aimed at practitioners, we discuss the most common mistakes in setting up portfolio models and in solving them algorithmically.

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  • Thomas Schmelzer & Raphael Hauser, 2013. "Seven Sins in Portfolio Optimization," Papers 1310.3396, arXiv.org.
    • Handle: RePEc:arx:papers:1310.3396
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    File URL: http://arxiv.org/pdf/1310.3396
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    References listed on IDEAS

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    Cited by:

    1. Mark R. Powell, 2015. "Risk‐Based Sampling: I Don't Want to Weight in Vain," Risk Analysis, John Wiley & Sons, vol. 35(12), pages 2172-2182, December.
    2. Boudt, Kris & Laurent, Sébastien & Lunde, Asger & Quaedvlieg, Rogier & Sauri, Orimar, 2017. "Positive semidefinite integrated covariance estimation, factorizations and asynchronicity," Journal of Econometrics, Elsevier, vol. 196(2), pages 347-367.

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