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Trading and Money Management in a Student-Managed Portfolio by Jason Greene, Brian Bruce

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Chapter 4

Portfolio Construction

Once a security is selected, its weight or position must be determined in order to construct the portfolio. Portfolio construction is the process of using security characteristics to combine the securities in a way that optimizes the portfolio’s outcomes. Security selection is usually considered the primary driver of portfolio returns, and portfolio construction is usually considered to primarily impact the portfolio’s risk. This chapter discusses the how characteristics of portfolio securities combine to determine the portfolio’s absolute risk and risk relative to a benchmark. The chapter also offers practical considerations to student-managed investment funds in optimizing a portfolio for various objectives. ...

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