# Truncation Method for SMRPs

### Sparse Mean-Reverting Portfolios generated with the truncation method.

#### Introduction

We will be building off the previous article on non-sparse synthetic portfolios and look at the truncation method for generating sparse mean reverting portfolios. This is part of a 3 article series where we start with a non-sparse method and then climb into some heuristic approaches to sparsity. Our first heuristic approach is the truncation method. This is quite an easy method to understand so this should be a comfortable introduction; I’ll also be including code so that readers can follow along themselves.

As with before, we will be using a pre-defined set of stocks in the S&P500 that are all in the same industry. Keeping the data the same should help for easier comparison.