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