Turnover of investment portfolio via covariance matrix of returns

Abstract

An investment portfolio consists of $n$ algorithmic trading strategies, which generate vectors of positions in trading assets. Sign opposite trades (buy/sell) cross each other as strategies are combined in a portfolio. Then portfolio turnover becomes a non linear function of strategies turnover. It rises a problem of effective (quick and precise) portfolio turnover estimation. Kakushadze and Liew (2014) shows how to estimate turnover via covariance matrix of returns. We build a mathematical model for such estimations; prove a theorem which gives a necessary condition for model applicability; suggest new turnover estimations; check numerically the preciseness of turnover estimations for algorithmic strategies on USA equity market.