Portfolio Optimization w/ Noisy Covariance Matrices
with Jose Menchero, PhD, CFA, Head Portfolio Analytics Research at Bloomberg
During this deep-dive discussion, Jose Menchero, PhD, CFA will explore the effect of sampling error in the covariance matrix when constructing portfolios using mean-variance optimization – showing that as the covariance matrix becomes increasingly ill-conditioned (i.e., “noisy”), optimized portfolios exhibit certain undesirable characteristics such as under-prediction of risk, increased out-of-sample volatility, inefficient risk allocation, and increased leverage and turnover.
These results will be explained by introducing the concept of alpha portfolios (which explain expected returns) and hedge portfolios (which serve to reduce risk). The noise in the covariance matrix leads to systematic biases in the volatility and correlation forecasts of these portfolios, which in turn explains the adverse effect cited above. A robust technique for estimating correlations that mitigate such adverse effects will also be presented. Our method is applied to the case of estimating the factor correlation matrix for multi-asset-class risk models.
*Lunch will be served
Jose Menchero, PhD, CFA, Head Portfolio Analytics Research, Bloomberg
Jose Menchero serves as Head of Portfolio Analytics Research at Bloomberg. Dr. Menchero and his team are responsible for developing the full suite of factor risk models spanning multiple asset classes, as well as portfolio risk and return attribution, portfolio construction, and portfolio optimization. Prior to joining Bloomberg, he was the founder and CEO of Menchero Portfolio Analytics Consulting. Before founding his consulting firm, Dr. Menchero worked for eight years at MSCI, where he was Managing Director responsible for developing the Barra equity risk models, and for portfolio construction research. He also served for seven years as Director of Research at Thomson Financial, where he developed several risk and return attribution methodologies, as well as equity factor risk models. Dr. Menchero has over 30 finance publications in leading practitioner journals. Before entering finance, he was Professor of Physics at the University of Rio de Janeiro in Brazil. Dr. Menchero holds a PhD in theoretical physics from University of California, Berkeley, a BS in aerospace engineering from University of Colorado, Boulder, and holds the CFA designation.
11:30 a.m. - Registration & Lunch
12:15 p.m. - Presentation
1:15 p.m. - Q&A
1:30 p.m. - Event Concludes
FREE for both Members & Non-Members
This event qualifies for 1.5 hours of continuing education credit for CFA Charterholders.
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