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There's a curve in finance that most investors get wrong.
It's called the efficient frontier.
Markowitz defined it in 1952.
Most investors still don't understand what it means in practice.
Here's what they get wrong:
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WHAT IT ACTUALLY IS
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The efficient frontier is the set of portfolios offering the maximum expected return for a given level of risk.
Mathematically: minimize w'Σw subject to a target return.
Every point
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MISTAKE 1: OPTIMIZING ASSETS, NOT STRATEGIES
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Most people run mean-variance optimization on a basket of stocks or ETFs.
The problem: correlated assets give you an illusion of diversification.
The real input
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MISTAKE 2: TREATING THE INPUTS AS FIXED
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The frontier is only as good as your covariance matrix.
Correlations shift. Volatility clusters. The matrix you estimated last year isn't the one you're trading