Heuristic Risk Measures Heuristics are practical rules or general practices that come from experience rather than formal scientific analysis. They're not necessarily wrong, but they tend to be simple, one-size-fits-all solutions and may not align perfectly with modern portfolio theory….

Risk budgeting involves distributing the total portfolio risk efficiently among its components. It's a crucial element of a robust risk management process, which consists of these four steps: Define the relevant risk metrics based on the fund's mandate: Should you…

Active Share Active Share represents the degree to which the underlying portfolio mimics a benchmark. $$ \frac{1}{2} \sum_n \mid W_{p,i} – W_{b,i} \mid $$ Where: \(\sum_n\) = Total number of securities in the portfolio or in the benchmark. \(W_{p,i}\) =…

Active Share Active Share represents the degree to which the underlying portfolio mimics a benchmark. $$ \frac{1}{2} \sum_n \mid W_{p,i} – W_{b,i} \mid $$ Where: \(\sum_n\) = Total number of securities in the portfolio or in the benchmark. \(W_{p,i}\) =…

Investment approaches can be categorized as: Systematic or discretionary. Bottom-up or top-down. $$ \textbf{Systematic vs. Discretionary} \\ \small{\begin{array}{l|l} \textbf{Systematic} & \textbf{Discretionary} \\ \hline {\text{The objective of systematic strategies is} \\ \text{to construct portfolios whose returns are} \\ \text{derived from a…

Active returns are assessed in relation to a benchmark. If a portfolio holds the same securities in the same proportions as the benchmark, no active return exists. However, active return emerges when the portfolio manager starts to allocate more or…

Holdings-based Approaches In a holdings-based approach, the style scores of individual holdings within a portfolio are combined. Each holding receives a ‘score,’ which is then summed to evaluate the entire portfolio. An example of this approach is the Morningstar Style…

Defining the investment thesis. Data acquisition and processing. Back testing the strategy. Evaluate the strategy. Construct the portfolio. Defining the Investment Thesis The initial step involves creating an investment thesis that identifies a potential market opportunity. Quantitative analysts (known as…

Statistical Arbitrage Define the investment universe: An analyst defines a broad category for potential investments. For instance, they might consider European Union equities. Narrow down the scope: The next step is to narrow down the range of options to make…

Statistical Arbitrage Pairs Trading Statistical arbitrage aims to generate profits by recognizing relationships between two securities and using this relationship to predict the future movement of their prices. Typically, this relationship is based on the correlation between the prices of…