Monte Carlo efficient frontier with optimal allocation
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Portfolio Construction Note
The Sharpe-optimal portfolio from Monte Carlo simulation concentrates heavily in the highest-return assets, producing an HHI above 0.25 — the threshold where concentration risk becomes material. Effective number of bets (1/HHI) below 4 suggests insufficient diversification for an institutional mandate. Consider adding minimum-variance and risk-parity alternatives alongside the max-Sharpe portfolio for a more complete picture.
Diversification Benefit
The efficient frontier demonstrates that a multi-asset allocation across technology, financials, and energy sectors reduces portfolio volatility by 15-25% relative to single-sector concentration, while preserving upside return potential through low cross-sector correlation.
Portfolio Risk Characteristics
This optimization uses historical return distributions which may not capture tail risk or regime changes. The Sharpe ratio assumes returns are normally distributed — consider supplementing with CVaR analysis (see VaR page) for fat-tail risk. Rebalancing costs and tax drag are not modeled; real-world implementation should account for a 20-40 bps annual drag from periodic rebalancing.