Accuracy and Rounding in Portfolio Construction
5 Pages Posted: 6 May 2013
Date Written: April 30, 2013
Portfolio theory got it all wrong: asset weights are not decision variables, because security prices a portfolio manager does not have full control over asset prices. In this note, we are trying to create awareness that real-valued allocations which have been calculated from numerical portfolio construction algorithms require further processing in order to become investable quantities. Depending on the size of the portfolio and asset price structure, the differences between "paper portfolios" and investable allocations can be significant. We also derive a portfolio-based accuracy threshold which can be used as a criteria to assess various numerical accuracy issues in quantitative portfolio construction.
Keywords: portfolio construction, portfolio analysis, asset allocation, accuracy, rounding
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