Risk budgeting and trade sizing: why they matter to multi-asset portfolio construction

In the current environment of heightened uncertainty, managing a multi-asset portfolio has rarely looked as complex as it does today, especially for those investors looking for an appropriate governance model on which to take investment decisions.The issue is not only to make accurate market forecasts and formulate appropriate investment views, but also to construct an efficient portfolio based on these views within a given risk budget.

Mean-variance optimization has long been recognized as a standard practice, but, in our view, it can lead to highly concentrated and unstable portfolios. A purely risk-based optimisation also implies regular and strict rebalancing which is hardly suitable for those portfolios where asset allocation is combined with other sources of potential alpha generation.

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