We propose a novel approach to optimizing portfolios with large numbers of assets. We model directly the portfolio weight in each asset as a function of the asset's characteristics. The coefficients of this function are found by optimizing the investor's average utility of the portfolio's return...

We investigate the properties of mean-variance efficient portfolios when the number of assets is large. We show analytically and empirically that the proportion of assets held short converges to 50% as the number of assets grows, and the investment proportions are extreme, with several assets...

We construct a simple reduced-form example of a conditional pricing model with modest intrinsic nonlinearity. The theoretical magnitude of the pricing errors (alphas) induced by the application of standard linear conditioning are derived as a direct consequence of an omitted variables bias. When...