Portfolio Construction Theory

Here, we begin building a framework for thinking about how assets fit together in a portfolio, starting with a puzzle that challenges conventional intuition, working through the mechanics of diversification, and ultimately applying these concepts to real portfolio decisions.

The core insight we'll develop: an asset's standalone characteristics can be misleading. How an asset interacts with everything else you own deserves as much attention as its individual return and risk profile.

In this first entry in the series, we establish that diversification benefit is maximized when assets contribute equal risk to the portfolio, which we call the ​"Diversification Sweet Spot."

View and download Part I (PDF)