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Views on non-Normal markets [41]

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Bullet points include: Calculate through time observed return divided by estimated tracking error. Each month, estimate out-of-sample covariance matrix and hence tracking error using prior monthly relative returns. Start 36 months into dataset. Apply to 100 x 23 random portfolios (100 with 1 sector position, 100 with 2 sector positions etc.). Calculate percentiles and moments for observed spread of this statistic. Cross-sectional adjustment not quite as effective as we might have hoped. Refine with “contemporaneous” estimates of volatility and average correlation? kurtosis, 90%ile, 99%ile, 99.9%ile, Unadjusted data, Longitudinal adjustment, Cross-sectional adjustment, c.f. expected if Gaussian

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