A visualization of a simple example of the proposed Markov Markowitz Model (IMAGE)
Caption
In this example, there are only two states, five months of data, and four assets. Given that the last state is state 2, the probability of transitioning to state 1 is 1/3 and the probability of transitioning to state 2 is 2/3. The tangency portfolios for each state is calculated using only data within that state, and the final portfolio is an aggregation of these state tangency portfolio, weighted by the state transition probabilities: 1/3 and 2/3.
Credit
Nolan Alexander et al
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License
CC BY-NC-ND