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Final Project Topic: Asset Management & Portfolio Construction
Overall goal
Develop and test with a portfolio strategy, a set of rules that determines how much you invest in each asset at a given point in time.
Possible assets include risk-free asset, individual stocks, existing portfolios of stocks constructed by other asset managers (e.g., industry portfolios from Ken French’s website), exchange-traded funds (including bond funds, which is an easy way to add bonds to your portfolio), currencies (cash), and cryptocurrencies. You can take negative positions (i.e., short) in stocks, funds, and currencies. You cannot take negative positions in cryptocurrencies — it is quite difficult to short crypto. Altogether, your weights should add up to 1 if you propose a long-only portfolio and sum up to 0 if you propose a (balanced) long-short portfolio.
A static portfolio buys once and does not rebalance. In a static portfolio, asset weights evolve just based on the performance of those assets. For example, if I invest 50% AAPL and 50% MSFT, and MSFT does better than AAPL over the next month, then the value of my MSFT position increases more than the value of my AAPL position. Consequently, my portfolio will be overweight MSFT and underweight AAPL.
A dynamic portfolio rebalances at some frequency. This rebalancing is a key part of an investment strategy as to minimize allocation drift. Keep in mind that maintaining fixed weights requires rebalancing. In the example above, to get back to a 50/50 split between MSFT and AAPL, I would need to sell some MSFT shares and buy AAPL shares. You can use other information to inform your rebalancing — maybe you want to go long small firms and short large firms and rebalance when a small firm gets to be large? This is just an example.

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