Portfolio Construction Matters

17 Pages Posted: 11 Nov 2018

See all articles by Stanislao Gualdi

Stanislao Gualdi

Capital Fund Management

Stefano Ciliberti

Capital Fund Management

Date Written: October 18, 2018

Abstract

The role of portfolio construction in the implementation of equity market neutral factors is often underestimated. Taking the classical momentum strategy as an example, we show that one can significantly improve the main strategy's features by properly taking care of this key step. More precisely, an optimized portfolio construction algorithm allows one to significantly improve the Sharpe Ratio, reduce sector exposures and volatility fluctuations, and mitigate the strategy's skewness and tail correlation with the market. These results are supported by long-term, world-wide simulations and will be shown to be universal. Our findings are quite general and hold true for a number of other "equity factors". Finally, we discuss the details of a more realistic set-up where we also deal with transaction costs.

Keywords: Portfolio Construction, Equity Market Neutral Factors, Asset Management

JEL Classification: G10, G11, G15, G17

Suggested Citation

Gualdi, Stanislao and Ciliberti, Stefano, Portfolio Construction Matters (October 18, 2018). Available at SSRN: https://ssrn.com/abstract=3267808 or http://dx.doi.org/10.2139/ssrn.3267808

Stanislao Gualdi (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Stefano Ciliberti

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

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