Portfolio selection revisited

In 1952, Harry Markowitz formulated portfolio selection as a trade-off between expected, or mean, return and variance. This launched a massive research effort devoted to finding suitable inputs to mean-variance optimization. The estimation problem is high dimensional and a factor model is at the core of many attempts. A factor model can reduce the number of parameters that need to be estimated to a manageable size, but these parameters may incorporate substantial, hidden estimation error. Recent analysis elucidates the nature of this error, identifies a mechanism by which it can corrupt optimization and provides a method for its mitigation. We explore this analysis here by illustrating how to improve the volatility ratio of large optimized portfolios, leading to superior portfolio selection.& lowast;\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$<^>{*}$$\end{document}