Portfolios of what?

Markowitz clearly had portfolios of stocks in mind.  It is also possible to see cash as another asset in the mix there, and government bonds.  But why not strategies or asset classes or even factors.  I really like the idea of strategies-and-factors.  To make this clear, imagine there was a well represented tradable ETF for each of the major strategies, being macro economic, convertible arbitrage, credit, volatility, distressed, m&a, and equity long short, commodities, carry trade.  Furthermore imagine that the equity long/short was itself a portfolio of factors, perhaps even itself an ETF.

A portfolio of factors from the factor zoo makes for an interesting though experiment.  I realise just how important it is to understand the correlation between factors.

Also, in the limit, imagine a long stock and a short call option on the same stock.  Can delta be recovered here using the linear programming (or quadratic programming) approach?  Unlikely.  But it highlights one of the main difficulties of the portfolio approach of Markowitz - just how accurate (and stable) can our a priori expected returns and expected covariances be?  

Imagine a system whose expected returns and expected covariances are radically random on a moment by moment basis.  The meaning and informational content of the resulting linearly deduced $x_i$s must be extremely low.  There has to be a temporal stability in there for the $x_i$s to be telling me something.  Another way of phrasing that temporal stability is: the past is (at least a little bit) like the expected future.  Or perhaps, to be more specific, imagine a maximum entropy process producing a high variance uniformly distributed set of returns; the E-V efficient portfolio isn't going to be doing much better than randomly chosen portfolios.

Also, surely there ought to be a pre-filtering step in here, regardless of whether the portfolio element is a security or a factor or an ETF representing a strategy, or perhaps even an explicit factor which is based not on and ETF but on the hard groundwork of approximating a strategy.  The pre filtering strategy would look to classify the zoo in terms of the relatedness of the strategies, on an ongoing basis, as a way of identifying, today, a candidate subset of portfolio candidates for the next period or set of periods.  Index trackers (and ETFs generally) already do this internally, but it ought to be a step in any portfolio analysis.  The key question you're answering here is: find me the cheapest and most minimal way of replicating the desired returns series such that it is within an acceptable tracking error.