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PortfolioChoice: A New Approach to Portfolio Optimization

QS RESEARCH GROUP

SEPTEMBER 01, 2010

A half-century ago, a revolution got underway in the world of finance with the birth of modern portfolio theory. The ground-breaking work of economist Harry Markowitz provided a rigorous mathematical framework for modeling the risk-return characteristics of portfolios. However, in today’s world, investor preferences are often not as simple as choosing a direct trade-off between expected return and volatility.

PortfolioChoice was designed to add new depth to the discipline of portfolio modeling and optimization. It is intended to define a portfolio’s efficiency according to how well it meets the investor’s objective, rather than simply its volatility and return characteristics. It also addresses a range of issues that fall outside the scope of traditional modeling and optimization techniques—issues such as incomplete manager data and non-normal returns, which are both common phenomenons in today’s markets.

PortfolioChoice represents an important evolutionary step in practical finance that has been made possible by the recent advances in finance and finance related fields, such as statistics, econometrics and operations research. Ultimately, we believe that these advances and insights will help investors find better solutions to their investment challenges— and so better help them reach their financial goals.

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