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Mean-Variance Optimization and the CAPM

Mean-Variance Optimization and the CAPM

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1. The tendency to produce extreme portfolios combining extreme shorts with extreme longs. As a result, portfolio managers generally do not trust these extreme weights. This problem is typically caused by estimation errors in the mean return vector and covariance matrix. Figure 3: The E cient Frontier, Estimated Frontiers and Realized Frontiers.

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