medium · Quantitative Finance microstructure-arb
If an estimated covariance matrix is not positive semi-definite (often due to asynchronous data), why is it considered invalid for portfolio optimization?
- It prevents the calculation of the expected return.
- It could lead to a portfolio having a negative variance.
- It implies that all asset correlations are equal to zero.
- It ensures that the Sharpe Ratio is always maximized.
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