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I have been asked to select a n stocks among N stocks, to construct a portfolio. Some of them have have negative weekly returns on average. If I want to select these n stocks by constructing an 'optimal' portfolio using Markowitz theory, for example, does it make sense to remove the stocks with negative returns?

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  • $\begingroup$ Hi: not necessarily because they may help with the portfolio variance ( if you creating an efficient frontiier say ) so might still be valuable. $\endgroup$ – mark leeds Jun 8 at 22:36
  • $\begingroup$ Are there any short sale constraints? If yes, use a quadratic program to identify the in-scope assets. If not, you could short the ‚negative‘ assets (in the optimal portfolio) or follow @markleeds suggestion. $\endgroup$ – Kermittfrog Jun 8 at 22:53
  • $\begingroup$ The fact that some stocks have "negative weekly return on average" in your sample shows that your sample is too small to produce accurate expected return estimates. The positive, as well as the negative estimates are likely to be unreliable. $\endgroup$ – noob2 Jun 9 at 1:43
  • $\begingroup$ KermitFrog makes a good point about shorting. If you're not allowed to short, then there's still the possibility that, if the returns aren't grossly negative relative to the other retrurns, those negative return stocks could be held long just to offset the variance of some other stocks. I would let the optimizer tell you if they're useful. $\endgroup$ – mark leeds Jun 9 at 13:13

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