Diversification & Portfolio
Combine assets well and a portfolio behaves better than any single holding; combine them badly and you just add noise.
That is the problem this category attacks, across the explainers on correlation and covariance, Modern Portfolio Theory, the efficient frontier, the Capital Asset Pricing Model, and the Fama-French factor models, plus risk parity and the equal-weight versus market-cap-weight debate.
Investing With Purpose shows how diversification cuts risk without giving up expected return, and how an allocation framework turns that theory into real position sizes.
The aim is to move you from a pile of good ideas to one coherent, risk-aware portfolio built on evidence instead of instinct.
Diversification is the practice of spreading capital across many assets so that the failure of any single one does not…
Correlation measures how closely two assets move together. It runs from minus one to plus one and is the single most…
Covariance measures how two variables move together. It is the raw statistical input that feeds both correlation and…
Modern Portfolio Theory is the framework Harry Markowitz introduced in 1952 for choosing a portfolio based on the joint…
The efficient frontier is the set of portfolios that offer the highest expected return for each level of variance, or…
The Capital Asset Pricing Model expresses the expected return of an asset as a linear function of a single risk…
The Fama-French three-factor model extends the Capital Asset Pricing Model (CAPM) by adding two variables that CAPM…
The Fama-French five-factor model extends the three-factor framework by adding a profitability factor and an investment…
Risk parity is a portfolio construction approach that sizes each asset so it contributes the same amount of risk,…
Cap-weighted and equal-weighted indexes can hold exactly the same stocks and still behave very differently. The…
Strategic asset allocation is the long-horizon target mix of stocks, bonds, and other asset classes you set based on…
Tactical asset allocation is the deliberate, short- to medium-horizon deviation from your strategic weights to exploit…
Rebalancing is the act of selling what has grown above target and buying what has fallen below, to return your…
Drift bands are the tolerance ranges you set around each target weight in a portfolio. When an asset class drifts…
Sector exposure is the share of your portfolio tied to each major industry grouping. A portfolio can look diversified…
Geographic exposure is the share of your portfolio allocated to each region of the world. It determines which…
Factor exposure is the tilt of your portfolio toward systematic return drivers beyond the overall market, such as…
Home bias is the tendency of investors to hold a much larger share of domestic equities than the global market…
The 60/40 portfolio holds 60% in equities and 40% in bonds. It has been the default benchmark for balanced investors…
The barbell is an allocation approach that concentrates capital at two opposite extremes of the risk spectrum, very…
Liability-driven investing builds a portfolio around the cash flows you owe, not the returns you would like. Pension…
The Yale or endowment model is a long-horizon, equity-biased, alternatives-heavy allocation style developed by David…
A glide path is the preset schedule by which a target-date fund shifts from stocks toward bonds as the investor…
The Black-Litterman model blends the market's implicit expected returns with an investor's own views to produce…
Constant Proportion Portfolio Insurance (CPPI) is a rule-based strategy that keeps a portfolio above a chosen floor…
Factor timing is the attempt to rotate between equity factors (value, momentum, quality, size, low volatility) based on…
Risk budgeting is a portfolio construction method that assigns each holding a target share of total portfolio risk,…
Factor exposure constraints are bounds you place on a portfolio's loadings to systematic factors such as value, size,…
Ledoit-Wolf shrinkage is a technique for estimating a covariance matrix that pulls the noisy sample covariance toward a…
Robust portfolio optimization replaces single point estimates of expected returns and covariances with uncertainty…
The Black-Litterman model is a Bayesian framework for combining a market-equilibrium prior on expected returns with an…
Reverse optimization is the technique of inferring what expected returns must be in order for a given portfolio to be…
A minimum variance portfolio is the long-only mix of assets with the lowest possible portfolio variance, given a…
The maximum diversification portfolio is a long-only allocation that maximizes the ratio of the weighted average asset…
Hierarchical risk parity is a portfolio construction algorithm that uses graph clustering on the correlation matrix to…
Marcos Lopez de Prado has published a body of work that applies machine learning, signal processing, and graph theory…