29 votes
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Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?

Markowitz's concepts attracted a great deal of interest from theorists (and still do), but never had much application in practice. The results from practical application were always disappointing (...
nbbo2's user avatar
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16 votes
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Equivalent to Matlab's financial toolbox in python?

I took a quick look at Matlab's Financial Toolbox and attempted to map the features to corresponding Python packages – For asset allocation, portfolio optimization, and risk analytics: Standard ...
Helin's user avatar
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14 votes
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Calculating alpha and its meaning

Alphas from a time-series regression are error terms in the cross-sectional, linear relationship between expected returns and factor betas. If a factor model were correct those error terms (the alphas)...
Matthew Gunn's user avatar
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12 votes

Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?

There has been a split in the community ever since Mandelbrot published his paper "On the Variation of Certain Speculative Prices." See: Mandelbrot, B. (1963). The variation of certain speculative ...
Dave Harris's user avatar
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11 votes
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What does the concept "standard Markowitz approach" include?

The Markowitz mean-variance model is the basis for many extensions and portfolio solutions that have been discovered over the years: The standard model (Markowitz, 1952, 1959) originally only ...
develarist's user avatar
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9 votes

Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?

It is more complicated than that: It is not the optimization per se that leads to inferior results but the data you use. Kritzman et al. makes a strong case in defense of optimization vs. 1/N in this ...
vonjd's user avatar
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8 votes
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What are the quantitative requirements to distinguish between asset classes?

Defining asset classes from a quantitative perspective is an interesting question that is not really addressed "officially" as far as I know. Let's try to write some requirements you want ...
lehalle's user avatar
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7 votes
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utility function and CAPM in portfolio theory

Please have a look at this image, which I have copied from here: Here, the point M is the tangency portfolio of the capital market line. As you can see, the investor A (left hand side) can attain ...
Kermittfrog's user avatar
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7 votes

What's the point of resampling?

The "estimation problem" in Portfolio Optimization is a serious one. The parameters (returns and covariances) are known very imprecisely. For example the covariance between stocks and bonds ...
nbbo2's user avatar
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6 votes

What is smart beta, alternative index, factor investing?

In recent years there has been much attention given to defining indexes other than market-cap based indices. While market-cap based indices approximate the theoretical Market Portfolio enshrined in ...
nbbo2's user avatar
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6 votes
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Portfolio optimisation by asset allocation

There are very powerful software solutions out there, so you should not reinvent the wheel. One notable R package is PortfolioAnalytics. You can find a very good introduction here, where your ...
vonjd's user avatar
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5 votes

Backtest Results needed to Model Validate my Modern Portfolio Theory model

There is a recent a paper recently using a population test of all CRSP data from 1925-2013 as a test of whether a mean and a variance exist versus they do not exist. It overwhelmingly excluded mean-...
Dave Harris's user avatar
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5 votes

How to construct a Risk-Parity portfolio?

Another approach to construct a risk parity portfolio would be to use the formulation proposed by Spinu [1]: $$\begin{array}{ll} \underset{\mathbf{w}}{\textsf{minimize}} & \frac{1}{2}\mathbf{w}^{T}...
Zé Vinícius's user avatar
5 votes

Stress Testing approaches at Pension Funds/Asset Management companies

Many long term investors use historical events and the market moves associated with such events to stress test their portfolios. For example, they use the dot-com bust, the latest "great recession", ...
AlRacoon's user avatar
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5 votes

Asset Allocation with near zero rates

I'll add some comments, recognizing that 1) they are highly opinionated, and 2) they don't actually offer any real solutions. Hopefully more thoughtful and useful answers will emerge. First of all, ...
Helin's user avatar
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4 votes

Monte Carlo based mean variance optimization

I believe the question to be too vague to be a good interview question. If you want to do Mean Variance Optimization (MVO) it's hard to see the point of Monte Carlo simulation. One of the good thing ...
Bob Jansen's user avatar
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4 votes

Is mathematical finance relevant in asset managament?

As a start: I am sure some asset managers don't know too much mathematical finance and do a good job. They exist. On the other hand as a mathematician I see mathematics (and classicial mathematical ...
Richi Wa's user avatar
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4 votes
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Risk Parity / Equal Risk Contribution with Tail Risk Measures

For question 1), lets add the topic of positive homogeneity to the discussion: Whenever a risk measure is positively homogeneous, we can calculate risk contributions. A risk measure is positively ...
vanguard2k's user avatar
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4 votes
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How to calculate "portfolio cumulative return" from individual price data and weight of them?

These answers are missing the idea of path dependency. Your weights are only updated monthly. That means your weight on t0 is w0 and weight on t1 is w0*(1 + r1), weight on t2 is w0*(1+r1)*(1+r2) where ...
mperlow's user avatar
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4 votes
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Asset Allocation with near zero rates

Many pension funds use projected asset class returns (capital market assumptions or CMAs) and backward-looking estimates of volatilities and correlations to set the strategic asset allocation. A 10-...
RRL's user avatar
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4 votes
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Calculation of Market portfolio from efficient frontier

As @stans already said in the comments to your question, the existence of the market portfolio hinges on the existence of a risk free rate $r_f$, where risk free, in this context, means that its value ...
Kermittfrog's user avatar
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4 votes

Find k of n assets that "minimize" the correlation matrix

(I take it that 5 out of 10 assets is just an example, because in this case all combinations could easily be checked.) Here would be an example how to do it in R ...
Enrico Schumann's user avatar
4 votes
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What is the proper capital split/allocation between the long and short in a pairs trade?

There are many different approaches to creating a portfolio comprising long-short pairs trades. Many take the approach of market neutrality. They attempt to create a portfolio that is insensitive to ...
AlRacoon's user avatar
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3 votes
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What ultimately determines trading costs?

I would say that an important part of the trading cost is ultimately shaped by the balance of informed (those with private information) and non-informed (liquidy traders) market participants. Imagine ...
Mats Lind's user avatar
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3 votes

Asset allocation problem using Hidden Markov Model

The basic approach is as follows: When you estimate the HMM you estimate three things: When you are in which state The drifts of your assets The covariance matrices of your assets You would then ...
vonjd's user avatar
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3 votes
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Simulating returns from ARMA(1,0)-GARCH(1,1) model

This question has already been answered on Stack Overflow. As it is important to Quant Finance, so I have added R code here. Others users may add code of other programming software to simulate ARMA(...
3 votes
Accepted

Optimization: Factor model versus asset-by-asset model

A few points. First, In a typical factor model, the idiosyncratic piece (what you call $Var[\epsilon_k]$) is non-negligible, which results in a $\hat\Sigma$ that is going to be well-conditioned. ...
erbian's user avatar
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3 votes

Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?

Markowitz' method for mean-variance optimization was originally intended to demonstrate the "free lunch" of diversification. In that regard, it was and is still very successful. The method gained ...
David Addison's user avatar
3 votes
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In practice, how do pension plans determine their risk appetite?

I think there are many approaches to setting risk tolerance/appetite limits. Here are some examples that you may find interesting (from the most clearest): Risk Management Policy of NZ Superannuation ...
AK88's user avatar
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3 votes
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Implementing leveraged Risk Parity Portfolio using Direxion 3X ETF

Apologies in advance for being hyper-critical. I have somewhat strong feelings about this =P The purpose of risk parity is to improve portfolio efficiency via achieving better diversification. (We ...
Helin's user avatar
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