c04uf001.pdf

Chapter 4 Portfolio Construction

Portfolio construction distinguishes itself as the phase in which all the efforts of various investment professionals come together to create the portfolio best suited for the client. In addition to the work performed in the Security Assessment phase of the Investment Process, the Portfolio Construction phase brings together three analytical tasks of a more global nature: Asset Allocation, Sector Analysis, and Risk Management.

Firms that place their primary emphasis on the Portfolio Construction phase believe there are forces at work at the market level, the asset class level, and at the sector level that are more than just the sum of the micro factors driving individual securities. Hence the focus of this chapter is on those firms that place an added priority on macro level thinking in the construct of their client portfolios.

This chapter uses macro level data sets to cover a range of Portfolio Construction activities that reflect on macro level thinking. It starts with a review of the efficient frontier to discuss the diversification space of asset allocation. Next, we review sector leadership data: One data set presents 20 years of sector performance ranking and another includes 22 alpha factors. Our last section on risk management involves multiple data visualizations: One set presents better methods to showcase the overlap of holdings ...

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