Risk Constraints in Portfolio Construction In the process of portfolio construction, risk constraints play a pivotal role. These constraints can be either formal or heuristic. Heuristic constraints are controls that are imposed on the permissible portfolio composition through an exogenous…

Absolute and Relative Risk in Portfolio Management The process of determining absolute and relative risk in portfolio management is primarily influenced by two components: the position sizing of assets or factors (whether absolute or relative), and the covariance of these…

Understanding risk targets and their implications is crucial in portfolio management. Different mandates have varying risk targets, and establishing the appropriate level of risk is a subjective exercise. This document delves into the different risk targets for various mandates, the…

Risk Budgeting Risk budgeting is a strategic process in portfolio management where the total risk appetite of the portfolio is distributed among the various components of portfolio choice. This process is crucial in optimizing the portfolio’s exposures relative to the…

Portfolio construction can be perceived as an optimization problem, consisting of an objective function and a set of constraints. The objective function outlines the desired goal, such as maximizing a risk-adjusted return. Constraints, on the other hand, limit the actions…

 Active Share and Active Risk Active Share and active risk are two key metrics used to assess a portfolio manager’s performance against their chosen benchmark. They provide insights into the level of security concentration and the absolute or relative…

Active Management and Active Return Active management is a strategy employed by investors with the goal of generating portfolio returns that surpass the benchmark returns, once all costs are accounted for, at an acceptable level of risk. The surplus return,…

Investment Style Classification Process The investment style classification process is a method used to categorize the stock universe into distinct groups. These groups are formed based on the similarity of characteristics among the stocks. For instance, stocks like Apple and…

 Quantitative investing, also known as systematic or rules-based investing, is a structured investment process that starts with a hypothesis. For instance, an investor might hypothesize that companies with low price-to-earnings ratios outperform the market. To test this, the investor…

Active management is a strategy that involves making investment decisions in an attempt to outperform a specific benchmark index. Fund managers often employ this strategy, using their skills and proprietary data to add value at different stages of the investment…