Python for Finance, 3rd Edition

Chapter 18. Portfolio Construction and Risk

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Portfolio construction turns estimates of return and risk into concrete portfolios that respect constraints and risk limits. This chapter introduces the core optimization problems used in asset management, discusses how to estimate their inputs, and shows how to interpret portfolio risk in a way that connects back to mandates and benchmarks. It builds directly on the concepts and data structures from Chapter 17 and prepares the inputs used for signals, implementation, and reporting in Chapter 19 and Chapter 20.

The chapter develops the mechanics of portfolio construction and risk analysis. You will organize expected return, risk, and constraint information as inputs; estimate return vectors and covariance matrices; formulate mean-variance-style optimization problems; incorporate real-world constraints and risk budgets; and interpret portfolio risk through factor exposures and risk decomposition.

To follow along, you need a working Python environment ...