Bridging theory and practice: Developing an investment strategy and implementing a solution

Yoram Lustig and Sébastien Page

After reviewing the first step in the portfolio management process of setting investment objectives in Chapter 7 (see Figure 7.1), this chapter goes through the next three steps: (II) developing an investment strategy; (III) implementing a solution; and (IV) reviewing progress. We review how each step impacts portfolio construction and illustrate the interaction between modern portfolio theory and applied experience. Portfolio management has a history of investors turning academic insights into practice, and practitioners producing academic research, seeking solutions for real-world problems. A final section focuses on the future of portfolio theory.

Three themes run throughout the chapter. First, we use frameworks to consider all pertinent angles in a disciplined and repeatable manner at the different stages of portfolio management. Second, we break down complex concepts into manageable building blocks. Third, we emphasise the need of constantly adapting to change – the only constant in investing.

STEP II: DEVELOPING AN INVESTMENT STRATEGY: STRATEGIC ASSET ALLOCATION

Once the investment objectives and constraints are set, the next step in the portfolio management process

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