by Patrick Burns.
Abstract: Realized tracking errors are examined for a series of optimized portfolios using various estimates for the variance matrix. It is clear that the benchmark should be added mathematically to the variance matrix using the constituent weights — this dramatically outperforms the case where the benchmark is a separate asset in the return matrix or where relative returns are used. The common belief that factor models are to be preferred to sample variance estimates is confirmed, but only on condition that the benchmark is added mathematically to the variance matrix.
This version: 2003 May 06 (pdf)
See also the blog post ”How to add a benchmark to a variance matrix”.
jun 25, 26
Many people are of the opinion that R has a corner on convenient data analysis. That may or may not be true. But now R literally has a corner that [...]
jun 25, 26
The most likely topics to appear here are: the R language statistics programming in general optimization