Mean-Variance Optimization
A method that picks portfolio weights to maximize expected return for a chosen risk level, balancing reward against volatility.
Category: Optimizer & Performance
What is Mean-Variance Optimization?
Introduced by Harry Markowitz in 1952, mean-variance optimization treats each asset as a tradeoff between its expected return and its variance, while using correlations between assets to find combinations that sit on the efficient frontier. It is the foundational quantitative portfolio method.
Formula
w^* = \arg\max_w \; w^\top \mu - \frac{\lambda}{2} w^\top \Sigma w