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RMIM-1-portfolio-construction.html
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<!doctype html>
<html lang="en">
<head>
<meta charset="utf-8">
<title>Risk Management and Investment Management | Chapter 1 | Portfolio Construction</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<body>
<div class="reveal">
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<div class="slides">
<section>
<h1>Chapter 1</h1>
<h3>Portfolio Construction</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Steps in Alpha Analysis</h2>
<ol>
<li>Scale the alphas: α = Volatility × IC × Score</li>
<li>Trim outliers</li>
<li>Remove biases or undesirable bets (neutralization)</li>
<ul>
<li>Benchmark-neutralization</li>
<li>Cash-neutralization</li>
<li>Risk-factor-neutralization</li>
</ul>
</ol>
<aside class="notes">
IC = information coefficient. Benchmark-neutralization set the benchmark alpha to 0. Cash-neutralization sets the alphas such that there is not active cash position. Risk-factor-neutralization sets the alphas of risk factors to 0.
</aside>
</section>
<section>
<h2>Transaction Costs</h2>
<p><em>Definition: The cost of moving from one portfolio to another</em></p>
<ul>
<li>The annualized transactions cost is the round-trip cost divided by the holding period in years</li>
<li>Frequent rebalancing means high transaction costs so there is a tradeoff between expected active return, active risk, and transaction costs</li>
</ul>
</section>
<section>
<h2>Techniques for Portfolio Construction</h2>
<ul>
<li>Screenining</li>
<ol>
<li>Rank stocks by alpha</li>
<li>Select first <em>X</em> stocks</li>
<li>Weight the stocks</li>
</ol>
<li>Stratification - a screening technique that ensures the sample is representative of the total population</li>
<li>Linear programming - characterizes stocks along risk dimensions</li>
<li>Quadratic programming - explicitly considers alpha, risk, and transaction costs</li>
</ul>
</section>
<section>
<h2>Dispersion</h2>
<p><em>Definition: The difference between the maximum return and minimum return for separate account portfolios</em></p>
<ul>
<li>Client-driven dispersion due to different constraints</li>
<li>Manager-driven dispersion: lack of attention, transaction costs, etc.</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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