medium · FRM Part 2 Risk & Investment Management
A fund uses quadratic programming (QP) for portfolio construction. A risk audit finds that the model is 'error maximizing.'
What specific behavior of the QP optimizer is this referring to?
- The optimizer disregards transaction costs entirely, producing excessive turnover that steadily erodes alpha
- The model simply fails to converge once the number of assets exceeds available data points
- The optimizer loads aggressively on assets with overestimated alphas and underestimated correlations.
- The model relies on historical simulation instead of a parametric covariance matrix to estimate risk
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