Portfolio Construction Memo
Date: January 16, 2026
Portfolio Universe: quantstrat, velox
Risk-Free Rate: 4.00%
Max Weight Constraint: 65.0%
CVaR Alpha: 5.0%
1. Executive Summary
Recommended Allocation: MaxSharpe
| Metric | Value |
|---|
| Expected Return | 16.1% |
| Volatility | 1.7% |
| Sharpe Ratio | 7.13 |
| CVaR (95%) | -0.04% |
| Max Drawdown | -0.29% |
Rationale: The MaxSharpe portfolio delivers the highest risk-adjusted return with a Sharpe ratio of 7.13, meaningfully outperforming the EqualWeight baseline (6.35 Sharpe). While it tilts toward velox at the 65% constraint maximum, this is justified by velox's superior return profile. The extremely low correlation between strategies (0.07) ensures genuine diversification benefits are preserved despite the concentrated tilt.
Source: portfolio_performance.csv
2. Correlation Analysis
2.1 Correlation Matrix
| quantstrat | velox |
|---|
| quantstrat | 1.00 | 0.07 |
| velox | 0.07 | 1.00 |
Source: portfolio_correlation.csv
2.2 Diversification Assessment
| Metric | Value | Assessment |
|---|
| Max Correlation | 0.07 | Excellent |
| Negative Correlations | 0 pairs | N/A |
| Correlation > 0.5 | 0 pairs | None |
Key Observations:
- The correlation of 0.07 between quantstrat and velox indicates near-zero linear relationship, providing exceptional diversification
- Both strategies can be expected to perform independently, reducing portfolio-level drawdowns
- This low correlation is a rare and valuable characteristic that should be preserved
3. Optimization Results
3.1 Performance Comparison
| Portfolio | Exp. Return | Volatility | Sharpe | CVaR(95) | Max DD |
|---|
| EqualWeight | 13.9% | 1.6% | 6.35 | -0.04% | -0.42% |
| MaxSharpe | 16.1% | 1.7% | 7.13 | -0.04% | -0.29% |
| MinVar | 13.9% | 1.6% | 6.35 | -0.04% | -0.42% |
| RiskParity | 13.9% | 1.6% | 6.35 | -0.04% | -0.42% |
| CVaR | 15.5% | 1.7% | 6.96 | -0.04% | -0.28% |
Source: portfolio_performance.csv
3.2 Weight Allocations
| Strategy | EqualWeight | MaxSharpe | MinVar | RiskParity | CVaR |
|---|
| quantstrat | 50.0% | 35.0% | 50.0% | 50.0% | 39.3% |
| velox | 50.0% | 65.0% | 50.0% | 50.0% | 60.7% |
Source: portfolio_weights.csv
3.3 Analysis
- MaxSharpe dominates on risk-adjusted basis: The 7.13 Sharpe ratio represents a 12% improvement over the EqualWeight benchmark (6.35), with the lowest max drawdown (-0.29%)
- MinVar and RiskParity converge to EqualWeight: Due to the near-identical volatility profiles of both strategies and their low correlation, these optimizers find no benefit from deviating from equal weights
- CVaR optimization favors velox: The CVaR portfolio tilts 60.7% to velox, suggesting velox has a more favorable tail risk profile
- All portfolios exhibit exceptional risk characteristics: Daily volatility of 1.6-1.7% and max drawdowns under 0.5% indicate both strategies are highly risk-controlled
4. Risk Contribution Analysis
4.1 Recommended Portfolio Weights
| Strategy | Weight | Role |
|---|
| velox | 65.0% | Primary |
| quantstrat | 35.0% | Secondary |
Note: Risk contribution file not available. Weights used as proxy for risk contribution given similar strategy volatilities.
4.2 Concentration Assessment
| Metric | Value |
|---|
| Top 1 Strategy Weight | 65.0% |
| Top 2 Strategies Combined | 100.0% |
| Strategies > 20% Weight | 2 |
| Strategies < 5% Weight | 0 |
4.3 EqualWeight vs Optimized Comparison
| Metric | EqualWeight | Recommended | Improvement |
|---|
| Expected Return | 13.9% | 16.1% | +16% |
| Volatility | 1.6% | 1.7% | +6% |
| Sharpe Ratio | 6.35 | 7.13 | +12% |
| Max Drawdown | -0.42% | -0.29% | -31% |
5. Implementation Considerations
5.1 Rebalancing
| Frequency | Recommendation |
|---|
| Calendar-based | Monthly |
| Drift trigger | 5% absolute |
5.2 Transaction Costs
| Factor | Estimate |
|---|
| Expected monthly turnover | 2-5% |
| Slippage assumption | 5 bps |
| Annual cost impact | 10-25 bps |
5.3 Liquidity & Sizing
| Account Size | Implementation Notes |
|---|
| < $1M | Full allocation feasible with minimal market impact |
| $1M - $10M | Monitor capacity constraints; may require scaled entry |
| > $10M | Assess strategy capacity limits; discuss with strategy managers |
6. Governance & Limits
6.1 Position Limits
| Strategy | Target | Min | Max |
|---|
| velox | 65.0% | 55% | 65% |
| quantstrat | 35.0% | 35% | 45% |
6.2 Drawdown Triggers
| Level | Threshold | Action |
|---|
| Watch | -0.5% | Monitor daily; review strategy performance |
| Alert | -1.0% | Reduce position sizes by 25%; notify risk committee |
| Action | -2.0% | Reduce to 50% exposure; conduct strategy review |
| Stop | -3.0% | Exit positions; full strategy reassessment |
6.3 Rebalancing Triggers
| Trigger | Threshold | Action |
|---|
| Calendar | Monthly | Rebalance to targets |
| Single position drift | >5% | Partial rebalance |
| Aggregate drift | >10% | Full rebalance |
7. Recommendation
7.1 Final Allocation
| Strategy | Weight |
|---|
| velox | 65.0% |
| quantstrat | 35.0% |
| Total | 100.0% |
7.2 Conditions for Implementation
- Confirm both strategies have sufficient capacity for intended allocation size
- Verify execution infrastructure supports monthly rebalancing with minimal slippage
- Establish real-time monitoring for drawdown triggers
7.3 Key Risks to Monitor
| Risk | Indicator | Mitigation |
|---|
| Correlation regime change | Rolling 60-day correlation > 0.30 | Reduce velox weight toward 50% |
| Velox underperformance | 3-month trailing return < quantstrat by 5%+ | Review strategy fundamentals; consider CVaR allocation |
| Volatility spike | Daily vol > 3% for 5+ days | Reduce overall exposure by 25% |
Data Sources:
/Users/syntax/projects/finance/allocator_analysis/reports/portfolio1_sdk_velox_quantstrat/portfolio_weights.csv/Users/syntax/projects/finance/allocator_analysis/reports/portfolio1_sdk_velox_quantstrat/portfolio_performance.csv/Users/syntax/projects/finance/allocator_analysis/reports/portfolio1_sdk_velox_quantstrat/portfolio_correlation.csv