Hands-On Machine Learning for Algorithmic Trading

Portfolio optimization and risk management

Alpha factors emit entry and exit signals that lead to buy or sell orders, and order execution results in portfolio holdings. The risk profiles of individual positions interact to create a specific portfolio risk profile. Portfolio management involves the optimization of position weights to achieve the desired portfolio risk and return a profile that aligns with the overall investment objectives. This process is highly dynamic to incorporate continuously-evolving market data.

The execution of trades during this process requires balancing the trader's dilemma: fast execution tends to drive up costs due to market impact, whereas slow execution may create implementation shortfall when the realized price ...