It is well known that estimated mean-variance portfolios deliver, on average, poor out-of-sample performance. A lesser-known fact that we characterize in this paper is that their out-of-sample performance is also very volatile. Using our analytical characterization of out-of-sample performance...

A natural approach to enhance portfolio diversification is to rely on factor-risk parity, which yields the portfolio whose risk is equally spread among a set of uncorrelated factors. The standard choice is to take the variance as risk measure, and the principal components (PCs) of asset returns...