by Jun Nakayama, Kosuke Tatsumura, Ryo Hidaka, Yohei Hamakawa
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Suggested foundations for portfolio construction and trading research and honest backtests. Specialist prerequisites vary by paper.
Understand the covariance structure of portfolio risk.
Read objectives, constraints and optimality conditions.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Construct allocations and examine sensitivity to estimated inputs.
Turn mathematical weights into feasible portfolio decisions.
Reconcile signals, executions, positions and P&L.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.