Think Like A PM: Add Turnover In Your Portfolio Optimiser Objective (opens in new tab)

For some PMs, they will treat transaction costs as something to be solved outside of their optimisers. They throw their expected returns and covariance matrices into a mean-variance optimiser, take what comes out of them, and feed them into an execution algorithm to handle transaction costs. If you’re doing this, I bet you’re wincing at the turnover produced by your optimiser, and then you have to throttle your execution algorithm really hard to deal with this. Here’s an idea, build transacti...