The first article of the series evaluates and distinguishes the components of asset modelling process responsible for the poor performance of the optimal portfolios. This process examines whether the most significant challenge of the modelling process is arising due to the calibration uncertainty, the incorrect model structure, or the simple fact that historical data poorly predicts the future market movements.
Part I - Portfolio Construction - Parameter & Model Uncertainty
There is a number of challenges associated with portfolio construction based on historical data. This three-part article series explores some of the most common issues attributed to the model-based portfolio optimization: the sensitivity to changes in data, large variations in portfolio weights and the bad out-of-sample performance.