Abstract
Practical Applications Summary In Donuts: A Picture of Optimization Applied to Fundamental Portfolios , published in the Winter 2018 issue of The Journal of Portfolio Management , Ian Domowitz and Ameya Moghe (both of ITG Inc .), analyze the implications of constructing two-part portfolios consisting of an actively managed component for generating alpha and a passive component determined by a quantitative optimization process. A key aspect of their analysis is considering the effects on performance of transaction costs from active management and periodic rebalancing of a portfolio9s active and passive components. They also consider the effect of portfolio size on overall transaction costs. The authors use the metaphor of a donut to describe the design of their two-component portfolios. The hole in the center of the donut corresponds to the actively managed component, and the donut corresponds to the passive quantitatively optimized component.
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