Asset Anchoring

Since the post-optimization process chooses the set of portfolio weights on the lattice of points that satisfy all of the investability constraints and are closest to the optimal portfolio on a distance metric determined by the covariance matrix, assets with small standard deviations and higher correlations to the others are free to drift away from their optimal values, more so than other assets.  

In some cases, it may be desirable to keep such an asset’s weight close to its optimal value. To achieve this end, enter a positive value into the Asset Anchoring Column in the specific asset's row. This adds a penalty to the covariance matrix’s diagonal for that asset, which in turn penalizes distance for that asset from the optimal to investable portfolio. This penalty is quite similar to the quadratic risk penalty in optimization. Entering larger values will create more of an anchoring effect in the post-optimization process. In other words, increasing the anchoring of an asset will increase the penalty of changing the weight for that asset between optimal and investable, thus anchoring the investable portfolio to the optimal weight for that asset. Numerically, the anchoring coefficient adds to the diagonal of the covariance matrix. New Frontier recommends using "20" as a default value in order to explore the impact of anchoring an asset. Even with a very high positive value, post-optimization will shift assets according to asset increments and thresholds.