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Berk Günberk
Theme

2016 · The Journal of Portfolio Management

Building Diversified Portfolios that Outperform Out of Sample

What it asks

López de Prado traces the instability to a single step: inverting the covariance matrix. His method skips that step entirely. It places the assets into a tree by similarity and distributes risk down that tree from the top. The resulting portfolio is not theoretically optimal, but it holds up better out of sample.

What this paper connects to

  • Argues against · 1952

    Portfolio Selection

    Inverting the covariance matrix is the source of the instability; hierarchical clustering skips that step entirely.