Statistical Methods in Finance 2025

Portfolio Optimization beyond Markowitz Mean Variance Portfolio Optimization

By:Choudur Lakshminarayan
Stevens Instituteof Technology, USA

Mean variance portfolio optimization by Harry Markowitz ushered an era of quantitative decision making in asset allocation. In MVPO formulation the risk of a portfolio (variance) is optimized subject to linear constraints on assets and the target returns. However, due to potential instability in the covariance matrix (correlations, number of assets number of observations) as well as underlying distributions of the returns may be non-normal, alternative approaches have been proposed. We outline an information theoretic variance stabilization and optimization approach and trace the arc of evolution of portfolio optimization in finance.