Optimizing Optimization: The Next Generation of Optimization Applications and Theory (Quantitative Finance)

Novel approaches to portfolio construction 45

5.5

5.45

5.4

5.35

5.3

5.25

5.2

5.15

5.1

5.05

Tracking error

Tu r n o v e r

5

4.95

4.9

4.85

4.8

4.75

4.7

4.65

4.6

4.55

4.5

27

27.327.627.928.228.528.829.129.429.7

30

30.330.630.931.231.531.832.132.432.7

33

Color key

Value

0.580.61

Specific risk /Active risk

Figure 2.14 Turnover — tracking error — ratio of specific and active risk heatmap.

Table 2.3 Starting portfolio

Summary statistic Value

Expected return 0.2488%

Transfer coefficient 0.6047

Implied beta 1.0148

Tracking error 1.87%

Tax liability $5,104.72

Turnover –

Realized short-term gains $11,687.70

Realized short-term losses $13,594.12

Net realized short-term gains/losses ($1,906.41)

Realized long-term gains $41,000.23

Realized long-term losses $5,062.38

Net realized long-term gains/losses $35,937.85