English

The Sherman-Morrison-Markowitz Portfolio

Portfolio Management 2026-01-27 v1

Abstract

We show that the Markowitz portfolio is a scalar multiple of another portfolio which replaces the covariance with the second moment matrix, via simple application of the Sherman-Morrison identity. Moreover it is shown that when using conditional estimates of the first two moments, this "Sherman-Morrison-Markowitz" portfolio solves the standard unconditional portfolio optimization problems. We argue that in multi-period portfolio optimization problems it is more natural to replace variance and covariance with their uncentered counterparts. We extend the theory to deal with constraints in expectation, where we find a decomposition of squared effects into spanned and orthogonal components. Compared to the Markowitz portfolio, the Sherman-Morrison-Markowitz portfolio downlevers by a small amount that depends on the conditional squared maximal Sharpe ratio; the practical impact will be fairly small, however. We present some example use cases for the theory.

Keywords

Cite

@article{arxiv.2601.18124,
  title  = {The Sherman-Morrison-Markowitz Portfolio},
  author = {Steven E. Pav},
  journal= {arXiv preprint arXiv:2601.18124},
  year   = {2026}
}

Comments

19 pages

R2 v1 2026-07-01T09:19:38.602Z