Macro Book

Portfolio Construction

Welcome to another article from the Macro Book. In the third section of our series, I explored the ideas and intricacies of risk and position sizing in more detail. This part is so important and sometimes underrated that I dedicated 4 articles to it.

As a reminder for all new subscribers, I announced late last year that I will publish a series of articles about PAMB (Paper Alfa Macro Book). This will encompass all relevant elements of a full investment process. We will cover the following important stages.

1. Idea Generation (Article 1, Article 2)

2. Idea Structuring (Article 1, Article 2)

3. Risk / Sizing (Article 1, Article 2, Article 3, Article 4)

4. Portfolio Construction

5. Risk Management

This will be fun and educational, aiming at anyone interested in all the necessary aspects to make this actionable. I will also make it interactive and provide useful tools for those interested.

Finally, we will run a portfolio of fictional trades encompassing any available tradeable, liquid asset class. All subscribers will be able to participate in the idea generation. We can even set up a mini-investment committee to steer the portfolio. It will be, therefore, more strategic than a day-trading vehicle.

Source: Dall-E

In the last section of the risk & sizing series, we took everything we learned in the previous posts and applied it to apply a risk-based sizing strategy. We also looked in more detail at how this applied to fixed-income instruments, which I hope all of you find very useful.

In this next section, we will be tackling the creative process of portfolio construction. We have the ideas, we know their risks and rewards but how do we put them all into a portfolio?

Let’s dive straight into it.