The effect of efficient weighting becomes even clearer when we expand
the portfolio to six assets.
The covariance matrix for the returns of
all six firms introduced in Example 17.1 is
As we can clearly see, the optimal weights are quite different from
the equal weights (). The weights which were used are shown
in text windows on the right hand side of Figure 17.3.
This efficient weighting assumes stable covariances between the assets over time. Changing covariance structure over time implies weights that depend on time as well. This is part of a large body of literature on multivariate volatility models. For a review refer to Franke et al. (2001).