Markowitz’s Portfolio Variance Describes Only a Limited Case of Constant Trade Volumes

Olkhov, Victor (2026): Markowitz’s Portfolio Variance Describes Only a Limited Case of Constant Trade Volumes.

Abstract

We show that Markowitz’s (1952) portfolio variance describes only a limited case when all volumes of successive trades at exchange with shares of all securities of the portfolio are assumed constant during the averaging interval. We overcome this limitation and derive market-based portfolio variance that depends upon the means, variances, and covariances of random values and volumes of consecutive trades. To derive that, we convert the time series of trades made at the exchange with shares of portfolio securities and obtain the time series that model the trades with the portfolio like with a single security. That establishes an equal description of market-based variance of any security and portfolio. If all trade volumes are assumed constant, the market-based variance coincides with Markowitz’ variance. We show the ties between the market-based variance of the portfolio and its Sharpe Ratio and describe the dependence of the portfolio Sharpe Ratio on random trade volumes. We prove that correlations between random prices and trade volumes always equal zero. To study market-based statistical dependence between random trade volumes and prices, one should empirically calculate correlations between prices and squares of trade volumes.

• Item Type: MPRA Paper
• Language: English
• Keywords: portfolio variance, portfolio theory, random trade volumes
• Subjects: G - Financial Economics > G0 - General > G00 - General; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies

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