Good morning to everyone except people who use a sample covariance matrix in their portfolio optimiser.
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ehhhh.... depends on your sample and depends on how much your optimizer relies on it.
Yeah ok, if you are not implicitly inverting it is probably fine. Or if n(observations) > 10 x n(assets) you might be alright too.
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Come for the joke. Stay for the useful heuristics.
Thanks. Twitter will use this to make your timeline better. UndoUndo
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i’m too stupid to reimplement galaxy brain optimizers and too paranoid to use ones someone else built, so i rely on the toolset of 20 years ago to make something that pretty much works but wont blow me up. its good to not trust your models all that much
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ewma-covariance matrixes: useful as one input for effective-VaR for day-to-day vol-management; uppertri(cov(r)) = 1 useful for setting your personal maint-margins
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Who bothers to calc a cov matrix *except* to implicitly invert it? (QR decomp counts!)
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You might be using it to enforce bounds on portfolio stdev, or doing some non-mean-variance optimisation (eg hierarchical risk parity, or risk parity in principal components)
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