Introduction

Brice Benaben and Julien Jarmoszko

The initial idea for this book originated from the connection between theory and practice in portfolio construction. While modern portfolio theory sets the theoretical foundation of portfolio construction, practical considerations have led to the development of new techniques at the edge of the academic world. Real progress comes from this continuous emulation between abstraction and application – as Steve Klabnik has pointed out, “theory is abstracted practice and practice is applied theory”. While the financial literature effectively covers portfolio theory, we felt there was insufficient analysis of its application by practitioners. With this in mind, we invited a team of industry leading experts and practitioners to help fill this gap.

The first part of the book explores these emerging alternative and innovative methodologies, as well as the key trends in portfolio construction from a practitioners’ perspective. In particular, it focuses on the latest techniques to manage risk and capture both traditional and alternative risk premiums – including smart beta investing, factor investing and risk parity – that have been increasingly adopted by portfolio managers. This is due