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Efficient Frontier: fixing highly concentrated portfolios
David Edwards
posted

I have been playing with several transformations of mean variance based portfolios to adjust for concentrated portfolios that go outside of margin requirements. This one does not solve the problem but does allow some control over it, and it's about as simple as they get.

The gist:
- solve for the efficient frontier weights
- Take the unit vector in the same direction
- Multiply by some scalar for the portfolio weights

The scalar could vary based on some other function but here its set constant at 1.25. It's the context.margin variable, not the correct name but I used an existing variable. Weights get multiplied by (1 + context.margin).

Any thoughts on the implications of this type of model.

3 responses
Grant Kiehne

Hello David,

Do you have a reference describing the efficient frontier theory? I'm curious how that works.

Grant

Peter Cawthron

Hello Grant,

You might find the 'Week 4' videos here of interest: https://class.coursera.org/compinvesting1-002/lecture/preview

It's a really good course I can recommend if it runs again on Coursera.

P.

Jason Swearingen

Hi Peter, thank you so much for posting that link. I'll go through it as soon as I finish Ernie Chan's book.

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