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Quantitative Finance · Glossary

What is Turnover penalty?

Definition 25.5 Research Craft: Predictors, Backtests, Measurement, Portfolios · Chapter 25 — Portfolio Construction I

A turnover penalty subtracts κ ∥w−w0∥1\kappa\,\lVert w - w_0\rVert_1 from the objective, a linear cost on the weight traded from the current book w0w_0; a turnover limit bounds ∥w−w0∥1\lVert w - w_0\rVert_1 instead.

Cumulative returns after costs, each book scaled to 10% annual volatility so that the slopes compare information ratios. Data: rs_portcons.run.
Figure 25.2. Cumulative returns after costs, each book scaled to 10% annual volatility so that the slopes compare information ratios. Data: rs_portcons.run.
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