Portfolio Construction

The term portfolio construction is more socially acceptable than trading strategy, both terms describe how we plan to place our bets every day. If our choice is simply to hold on to Mom's old shares of GE, we don't see the trading (or pay taxes or transaction costs), but the "trading" is still there 24/7.

Some Resources

Foster and Stine (2004). Being Warren Buffet: A Classroom Simulation of Financial Risk

This lovely paper reports on a simulation game that has been played by many cohorts of Wharton MBAs. It illustrates how subtle the influences of luck can be, and, as a corrollary, it suggests how difficult it may be to tell if a very successful investor might not have just been lucky. The now famous Pink strategy porvides an organic experience of the value of diversification. The paper also briefly touches on an important theoretical construct, volatility drag, which some money managers understand very well but more than a majority do not.

On what do returns depend?