Geometric insights into robust portfolio construction

13 Jul 2021  ·  Lara Dalmeyer, Tim Gebbie ·

We investigate and extend the results of Golts and Jones (2009) that an $\alpha$-weight angle resulting from unconstrained quadratic portfolio optimisations has an upper bound dependent on the condition number of the covariance matrix. This implies that better conditioned covariance matrices produce weights from unconstrained mean-variance optimisations that are better aligned with each assets expected return. We provide further clarity on the mathematical insights that relate the inequality between the $\alpha$-weight angle and the condition number and extend the result to include portfolio optimisations with gearing constraints. We provide an extended family of robust optimisations that include the gearing constraints, and discuss their interpretation.

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