Sequential Procedures for Monitoring Covariances of Asset Returns

Time variability of the expected returns as well as the volatility of asset returns can be caused by changes in the fundamental factors; for example, changes in commodity prices, macroeconomic policy, market trading activity, technological development, governmental policies, and so on. This leads to the deviation of a selected optimal portfolio from the Markowitz efficient frontier that consists of all portfolios with the highest expected return for the given level of risk or with the smallest risk for a preselected profit and, thus, is fully defined by the first two moments of asset returns (Markowitz, 1952). Changes in these characteristics are subject to structural breaks of the efficient frontier location in the mean-variance space and the optimal portfolios allocated on it.