« How to Bet: Correlation, Mean Regression, Expected Returns, and Position Sizing | Main | The Magic of Combination »



Feed You can follow this conversation by subscribing to the comment feed for this post.

Robert Michel

Great read as always. I would be interested in your thought on portfolio construction. In praxis I build my portfolio of the 25 securities with the highest expected returns. But after reading your article I realize, this might not the best strategy. It could have a positive effect to add securities with low expected maximum drawdown in proportion to the expected return. The other questions is how many securities are optimal to a) maximize expected portfolio returns or b) maximize the probability to beat a certain target return (something like a save withdraw rate).

Yuval Taylor

I think you're right about portfolio construction--you want to look not only at the best-case scenario for each security but at the worst-case as well. That's why minimizing risk and maximizing returns are (unlike what CAPM teaches) joined at the hip, as it were. As far as the number of securities goes, that really depends on three things: your AUM, your transaction costs, and the amount of conviction you have in your positions. With a high AUM and high transaction costs, you're going to want to invest in more securities in order to minimize market impact. I have about $1 million invested, I invest in microcaps, I trade frequently, and I use an automated system so I don't have a lot of conviction in individual stock picks. So I hold between twenty and twenty-five stocks at a time. If I had low transaction costs and put a lot of time into researching every position, I think eight or ten positions would be enough.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Your Information

(Name and email address are required. Email address will not be displayed with the comment.)