Outliers and Portfolio Optimization

he asset allocation problem was first adressed by Markowitz (1952) in a framework that considers the risk-return trade-off. In the Markowitz model, a probability distribution of security prices is assumed to be known and the return of any portfolio is quantified as its expected value (mean) and its risk as its variance 1 . These mathematical representations of return and risk have allowed optimization tools to be applied to the studies of portfolio management. According to the author, one can derive the minimum investment risk by minimizing the variance of portfolio, or for a given risk level which the investor can tolerate one can derive the maximum return by maximizing the expected returns of a portfolio(...)