Chapter 17: Portfolio Construction with Transaction Cost Analysis
Introduction
This chapter introduces techniques to bridge the gap between portfolio construction and trading. We introduce a quantitative framework to determine the appropriate “optimal” execution strategy given the “optimal” portfolio on the efficient investment frontier (EIF).
Portfolio optimization is the process of determining an optimum mix of financial instruments. These consist of portfolios with the highest return for a specified level of risk and the least risk for a specified return. These optimal portfolios are determined through advanced mathematical modeling approaches such as quadratic programming, and more recently conic optimization.
Markowitz (1952) presented ...
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