Portfolio Considerations in Trading

Abstract

In today’s turbulent marketplace with unprecedented portfolio turnover, transition activity and drawdowns, portfolio managers must identify and eliminate all sources of Sharpe ratio erosion. In this environment, trading costs and risks are significant contributors to this performance drag and avoiding them is the subject of this article. We observe and explain how common trading methods tend to increase costs and risks, and bridge the gap between portfolio management and the trade by introducing portfolio considerations in trading. Our techniques seek best execution from a portfolio perspective in accordance with Article 2 of the Uniform Prudent Investor Act [1].

TOPICS: Portfolio construction, VAR and use of alternative risk measures of trading risk, equity portfolio management