What Matters Most in Portfolio Construction?
This paper empirically studies a practical question for users of Markowitz portfolio construction: in the presence of transactions costs, what are the benefits of increasing return forecasting skill, lowering costs, or increasing cost forecasting skill? We measure benefit by expected impact on the realized information ratio, and estimate this using a large number of single-asset simulations.
KeywordsTransaction Cost Basis Point Forecast Skill Market Impact Trade Size
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