Chapter 6
Optimal Portfolios
The essence of investment management is the management of risks, not the management of returns.
—Benjamin Graham
This chapter applies the principles of Chapter 5 toward the construction of portfolios that characterize specific optimization objectives, for example, minimum variance portfolios or portfolios that maximize risk-adjusted returns; perhaps satisfying specific constraints like no shorting, or bounded allocations to certain securities. It makes sense to start with simple cases to fix ideas. We will build from the discussion in Chapter 5 on the Markowitz selection criteria.