Portfolio optimization and risk management

Alpha factors emit entry and exit signals that lead to buy or sell orders, and order execution results in portfolio holdings. The risk profiles of individual positions interact to create a specific portfolio risk profile. Portfolio management involves the optimization of position weights to achieve the desired portfolio risk and return a profile that aligns with the overall investment objectives. This process is highly dynamic to incorporate continuously-evolving market data.

The execution of trades during this process requires balancing the trader's dilemma: fast execution tends to drive up costs due to market impact, whereas slow execution may create implementation shortfall when the realized price deviates from the price that prevailed when the decision was taken. Risk management occurs throughout the portfolio-management process to adjust holdings or assume hedges, depending on observed or predicted changes in the market environment that impact the portfolio risk profile.

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