Portfolio Construction

Joaquin Narro and Monica Caamano

In this chapter we build a portfolio from two backward-looking strategies, with out-of-sample data for the period 2012 to 2017 used for backtesting. For the purpose of building a portfolio, we assume there are workable rules to trade one energy commodity per strategy. Our concern will be to figure out how to bring these two strategies together in a portfolio – that is, we would need to decide if the strategies complement each other and, if so, what the optimal ratio is that creates a superior portfolio. Finally, we provide a solution to sizing the portfolio to satisfy our needs according to our return-on-risk appetite.

Table 14.1 Strategy 1 – CO2: Trading assumptions
Contract ICE EUA futures – front Dec
Lot size 1,000 ton
Trading assumptions
Exchange fees 4 € / lot
Commissions 5 € / lot
Bid–offer 0.01 € / t
Size 9 lots
Net includes Exchange fee, commissions, bid–offer
Source: Authors’ own; Intercontinental Exchange
Table 14.2 Strategy 2 – Coal: Trading assumptions
Contract ICE API2 Rotterdam coal futures – front month
Currency US$
Lot size 1,000 ton
Trading assumptions
Exchange fees 9 US$ / lot

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