The Markowitz mean-variance framework is the foundation of modern portfolio theory. One problem with this approach, however, is how sample covariance matrices tend to underestimate risk. Since the biases of optimized portfolios are closely related to eigenfactor portfolios, we present a...

Sample covariance matrices tend to underestimate the risk of optimized portfolios. In this article, we identify special portfolios, termed “eigenportfolios,” that capture these systematic biases. Further, we present a methodology for estimating eigenportfolio biases and for adjusting the...