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4 May, 2015 - 12:21

Despite its theoretical importance, critics of MPT question whether it is an ideal investing strategy, because its model of financial markets does not match the real world in many ways.

Efforts to translate the theoretical foundation into a viable portfolio construction algorithm have been plagued by technical difficulties stemming from the instability of the original optimization problem with respect to the available data. Recent research has shown that instabilities of this type disappear when a regularizing constraint or penalty term is incorporated in the optimization procedure 1.