Mean-Variance Optimization in Practice: Reverse Optimization and Implied Expected Returns
Roman R.
The fact that mean-variance optimizers are highly sensitive to changes in expected returns […] is well known in investment practice1, with a couple of practical solutions already described in this blog, for example using near efficient portfolios or subset resampling-based efficient portfolios. In this blog post, I will introduce another approach originally described in Sharpe2 and known as reverse optimization3, which consists in trying to improve the robustness of expected returns estimates by