Portfolio Construction Memo

Date: January 16, 2026 Portfolio Universe: persistent, 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	18.3%
Volatility	1.7%
Sharpe Ratio	8.38
CVaR (95%)	-0.04%
Max Drawdown	-0.52%

Rationale: The MaxSharpe portfolio delivers the highest risk-adjusted returns with a Sharpe ratio of 8.38, significantly outperforming all alternatives. While it carries slightly higher volatility than MinVar (1.7% vs 1.3%), the substantial expected return premium of 3.9 percentage points (18.3% vs 14.5%) more than compensates for this modest increase in risk. The excellent diversification across all three strategies, combined with the favorable correlation structure (including negative correlation between quantstrat and velox), supports this allocation.

Source: portfolio_performance.csv

2. Correlation Analysis

2.1 Correlation Matrix

	persistent	quantstrat	velox
persistent	1.00	0.11	0.06
quantstrat	0.11	1.00	-0.04
velox	0.06	-0.04	1.00

Source: portfolio_correlation.csv

2.2 Diversification Assessment

Metric	Value	Assessment
Max Correlation	0.11	Excellent
Negative Correlations	1 pair	quantstrat-velox (-0.04)
Correlation > 0.5	0 pairs	None

Key Observations:

All pairwise correlations are exceptionally low (<0.12), indicating strong diversification benefits
The negative correlation between quantstrat and velox (-0.04) provides natural hedging
persistent shows low positive correlation with both other strategies, serving as a stable anchor
This correlation structure is highly favorable for portfolio construction and suggests meaningful risk reduction through diversification

3. Optimization Results

3.1 Performance Comparison

Portfolio	Exp. Return	Volatility	Sharpe	CVaR(95)	Max DD
EqualWeight	15.9%	1.6%	7.46	-0.03%	-0.48%
MaxSharpe	18.3%	1.7%	8.38	-0.04%	-0.52%
MinVar	14.5%	1.3%	7.76	-0.03%	-0.29%
RiskParity	15.1%	1.4%	7.72	-0.03%	-0.37%
CVaR	13.7%	1.3%	7.49	-0.03%	-0.31%

Source: portfolio_performance.csv

3.2 Weight Allocations

Strategy	EqualWeight	MaxSharpe	MinVar	RiskParity	CVaR
persistent	33.3%	36.0%	18.5%	25.7%	10.5%
quantstrat	33.3%	10.5%	39.2%	36.3%	42.2%
velox	33.3%	53.5%	42.4%	38.0%	47.4%

Source: portfolio_weights.csv

3.3 Analysis

MaxSharpe delivers the highest expected return (18.3%) and Sharpe ratio (8.38) by overweighting velox (53.5%), which appears to have superior risk-adjusted returns
MinVar achieves the lowest volatility (1.3%) and drawdown (-0.29%) by reducing persistent exposure and balancing quantstrat/velox
RiskParity provides a balanced allocation closest to equal weight, with moderate improvements across all metrics
CVaR minimizes tail risk exposure but sacrifices expected return (13.7%), heavily underweighting persistent (10.5%)
All optimized portfolios underweight quantstrat relative to equal weight except CVaR, suggesting it may have lower standalone return characteristics

4. Risk Contribution Analysis

Note: Risk contribution file (portfolio_risk_contributions.csv) is not available. Analysis below uses portfolio weights as a proxy for risk allocation.

4.1 Recommended Portfolio Weights

Strategy	Weight	Role
velox	53.5%	Primary driver of returns
persistent	36.0%	Secondary stabilizer
quantstrat	10.5%	Satellite diversifier

4.2 Concentration Assessment

Metric	Value
Top 1 Strategy Weight	53.5%
Top 2 Strategies Combined	89.5%
Strategies > 20% Weight	2
Strategies < 5% Weight	0

4.3 EqualWeight vs Optimized Comparison

Metric	EqualWeight	MaxSharpe	Improvement
Expected Return	15.9%	18.3%	+15.5%
Volatility	1.6%	1.7%	+7.6%
Sharpe Ratio	7.46	8.38	+12.3%
Max Drawdown	-0.48%	-0.52%	-7.2%

5. Implementation Considerations

5.1 Rebalancing

Frequency	Recommendation
Calendar-based	Monthly
Drift trigger	5% absolute

5.2 Transaction Costs

Factor	Estimate
Expected monthly turnover	3-8%
Slippage assumption	5 bps
Annual cost impact	10-25 bps

5.3 Liquidity & Sizing

Account Size	Implementation Notes
< $1M	Full implementation feasible; consider monthly rebalancing only
$1M - $10M	Standard implementation; monitor strategy capacity limits
> $10M	Verify underlying strategy capacity; may need staggered execution

6. Governance & Limits

6.1 Position Limits

Strategy	Target	Min	Max
velox	53.5%	40%	65%
persistent	36.0%	20%	50%
quantstrat	10.5%	5%	25%

6.2 Drawdown Triggers

Level	Threshold	Action
Watch	-0.75%	Monitor daily; review strategy performance
Alert	-1.5%	CIO notification; prepare for potential action
Action	-2.5%	Reduce position sizes by 25%; shift to MinVar weights
Stop	-5.0%	Suspend strategy; full review required

6.3 Rebalancing Triggers

Trigger	Threshold	Action
Calendar	Monthly	Rebalance to targets
Single position drift	>7%	Partial rebalance affected strategy
Aggregate drift	>10%	Full rebalance to target weights

7. Recommendation

7.1 Final Allocation

Strategy	Weight
velox	53.5%
persistent	36.0%
quantstrat	10.5%
Total	100.0%

7.2 Conditions for Implementation

Verify velox strategy has sufficient capacity for the proposed 53.5% allocation
Confirm current market regime supports the historical correlation assumptions (particularly the negative quantstrat-velox correlation)
Establish monitoring infrastructure for the drawdown trigger framework prior to deployment

7.3 Key Risks to Monitor

Risk	Indicator	Mitigation
Concentration in velox	Weight drift >60%	Hard cap at 65%; trigger rebalance
Correlation regime change	Rolling 60-day correlation >0.3	Review allocation; consider RiskParity
Strategy capacity	AUM growth >25% monthly	Assess market impact; reduce size if needed
Drawdown clustering	Multiple strategies down >1%	Invoke Action level protocol

Data Sources:

/Users/syntax/projects/finance/allocator_analysis/reports/portfolio2_sdk_velox_quantstrat_persistent/portfolio_weights.csv
/Users/syntax/projects/finance/allocator_analysis/reports/portfolio2_sdk_velox_quantstrat_persistent/portfolio_performance.csv
/Users/syntax/projects/finance/allocator_analysis/reports/portfolio2_sdk_velox_quantstrat_persistent/portfolio_correlation.csv

portfolio_construction.md