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Enhancing Markowitz's portfolio selection paradigm with machine learning

Author

Listed:
  • Marcos López de Prado

    (Abu Dhabi Investment Authority (ADIA)
    Cornell University)

  • Joseph Simonian

    (Autonomous Investment Technologies
    FDP Institute)

  • Francesco A. Fabozzi

    (Yale’s International Center for Finance)

  • Frank J. Fabozzi

    (Johns Hopkins University)

Abstract

In this paper we describe the integration of machine learning (ML) techniques into the framework of Markowitz's portfolio selection and show how they can help advance the robust mathematical strategies necessary for modern financial markets. By combining traditional econometrics with cutting-edge ML methodologies, we show how to enhance portfolio management processes including alpha generation, risk management, and optimization of risk metrics like conditional value at risk. ML's capacity to handle vast and complex datasets allows for more dynamic and informed decision-making in portfolio construction. Moreover, we discuss the practical applications of these techniques in real-world portfolio management, highlighting both the potential enhancements and the challenges faced by portfolio managers in implementing ML strategies.

Suggested Citation

  • Marcos López de Prado & Joseph Simonian & Francesco A. Fabozzi & Frank J. Fabozzi, 2025. "Enhancing Markowitz's portfolio selection paradigm with machine learning," Annals of Operations Research, Springer, vol. 346(1), pages 319-340, March.
    • Handle: RePEc:spr:annopr:v:346:y:2025:i:1:d:10.1007_s10479-024-06257-1
    DOI: 10.1007/s10479-024-06257-1
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    More about this item

    Keywords

    Machine learning; Signal generation; Feature selection; Portfolio optimization; Generative Language models; Natural language processing;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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