Year 3 · Applied Finance · Portfolio Construction
Portfolio Construction
Turn investment views into a coherent portfolio by combining expected return, risk, correlations, factors, liquidity, constraints, rebalancing and scenario analysis.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Translate investment objectives into portfolio constraints and risk budgets.
02
Use expected return, volatility and correlation to understand diversification.
03
Interpret efficient-frontier and mean-variance optimization outputs critically.
04
Measure marginal and component contributions to portfolio risk.
05
Manage factor, sector, duration, credit and liquidity exposures.
06
Design rebalancing rules and evaluate transaction-cost trade-offs.
07
Use scenario analysis, stress testing and drawdown controls in allocation decisions.
CONCEPT MAPFrom investment objective to resilient portfolio
Portfolio construction starts with what the capital must achieve
CORE FACTS · SAME IN EVERY MODE
Return objectives should be defined together with tolerance for volatility, drawdown and loss.
Time horizon, liquidity needs and liabilities materially affect feasible allocation.
Legal, tax, concentration and mandate constraints can override purely mathematical optimization.
A portfolio should be judged relative to its objective, not by return alone.
BeginnerTeaching style changes, knowledge does not.
Before choosing investments, decide what the portfolio is for. A pension fund, a university endowment and a student saving for tuition should not use the same portfolio.
PROFESSIONAL VOCABULARYInvestment policy statement / investment policy statement Liability / liability
Formal document defining objectives, constraints and governance for a portfolio.
Future financial obligation the portfolio may need to fund.