Abstract
In this chapter, we focus on portfolio construction. In particular, we present details of the classical mean–variance approach, including principles, algorithms, and examples of a long only and a market neutral long-short portfolio. We also discuss backtesting and portfolio performance attribution. We introduce Harry Markowitz who made important contributions to modern portfolio theory. Regarding industry insights, we show how industry practitioners build MV portfolios with practical constraints. For R programming, we discuss the structure of R codes and functions.
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Notes
- 1.
Photo credit: The CME Group Melamed-Arditti Innovation Award.
- 2.
- 3.
Data source: Morningstar Research. Data as of June 30, 2017.
- 4.
Data source: Bloomberg, BofA Merrill Lynch US Equity and US Quant Strategy.
- 5.
One such example is GE.
- 6.
For details about nonparametric approaches, please refer to Chap. 5.
- 7.
This phenomenon triggered much research in 2007 and 2008 regarding the validity of beta as a predictor of higher returns.
- 8.
For example, certain funds require a portfolio to have no exposure to alcohol and tobacco products.
- 9.
Photo source: https://www.northinfo.com/documents/389.pdf.
- 10.
Except for quantitative event-driven strategies.
- 11.
For many quant shops, it is routine to have team meetings about fund performance on a weekly or monthly basis.
- 12.
This can easily be converted to the absolute version.
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Ma, L. (2020). Portfolio Construction: From Alpha/Risk to Portfolio Weights. In: Quantitative Investing. Springer, Cham. https://doi.org/10.1007/978-3-030-47202-3_7
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DOI: https://doi.org/10.1007/978-3-030-47202-3_7
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