Overcoming Markowitz’s Instability with the help of the Hierarchical Risk Parity (HRP): Theoretical Evidence

In this talk we compare two methods of portfolio allocation, the classical Markowitz one and the hierarchical risk parity (HRP) based on a clustered optimization. We drive theoretical values of a noise of allocation weights coming from the variance estimation. We demonstrate that the HRP is indeed less noisy (and thus more robust) w.r.t. the classical Markowitz.

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