[R-SIG-Finance] portfolio optimization-autocorrelation in asset returns

[Patrick Burns]

Does the smoothing parameter of your covariance
matrix affect the results substantially?  You might
also try 'factor.model.stat' that is available in the
Public Domain area of http://www.burns-stat.com

Though it is somewhat out of character for me to
discourage minimum variance portfolios, perhaps
you want to include a prediction of the returns in
your optimization.


Patrick Burns
patrick at burns-stat.com
+44 (0)20 8525 0696
http://www.burns-stat.com
(home of S Poetry and "A Guide for the Unwilling S User")

Alexander Moreno wrote:
> Hi,
>
> I'm running a Markowitz Optimization using an EWMA correlation forecast and
> weekly data to find the minimum variance portfolios, updated every week, for
> a basket of currencies.  I'm finding that the performance is somewhat
> wanting, but when I remove currencies with significant positive
> autocorrelation over the sample, the performance over the same sample
> improves substantially (I know, my description is somewhat vague and this is
> also cheating).  However, I believe this is due to autocorrelation violating
> assumptions in the Markowitz Optimization framework, and I'm wondering if
> anyone could point me towards the best ways to get around this problem that
> don't involve looking at the autocorrelation over a sample and then removing
> the currency from the optimization for the same sample.
>
> Thanks,
> Alex
>
> 	[[alternative HTML version deleted]]
>
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