Portfolio Construction in Depth: Risk Budgets, Regimes and Stress Tests
Learn to build and maintain a multi-asset portfolio the way professionals do: allocate risk rather than capital, read correlation regimes, set honest return assumptions, define rebalancing and drawdown budgets, and stress-test the result on paper.
Self-study course Self-study course: written lessons, videos and downloadable materials for independent learning. There is no supervision, assessment, individual feedback or tutoring. Self-check quizzes are evaluated automatically in your browser — we do not see your results.
All 12 lessons free
Before you start
- Comfort with percentages, weighted averages and the two-asset volatility formula (course ETFs, Funds & Long-Term Investing)
- Basic knowledge of bonds, duration and yields (course Bonds & Fixed Income in Depth)
- A spreadsheet or calculator for the practice activities
What you will be able to do
- Calculate each asset's contribution to portfolio risk and compare it with its capital weight
- Recognise a change in the stock–bond correlation regime and estimate what it does to portfolio volatility
- Build a set of capital-market assumptions from CAPE and bond yields and state their limits
- Design rebalancing bands that balance drift control against transaction costs and German taxes
- Back out an equity share from a written maximum-drawdown budget using historical worst cases
- Size satellite positions with a tracking-error budget and identify satellites that add nothing
Lessons in this course
Risk budgeting: contribution to risk versus capital weights
Calculate how much of a portfolio's volatility each asset really causes, compare it with the capital weight, and apply the risk-parity idea to a three-asset portfolio.
Correlation regimes: when the stock–bond correlation flips
Understand why the stock–bond correlation changes sign with the inflation regime, read a rolling correlation chart and estimate the effect of a regime change on portfolio volatility.
Expected returns and their limits: CAPE, bond yields and your own capital-market assumptions
Estimate long-term expected returns for equities from the CAPE earnings yield and for bonds from the starting yield, combine them into a set of capital-market assumptions and state the error bands honestly.
Rebalancing bands in depth: absolute versus relative bands, costs, taxes and the rebalancing premium
Design absolute and relative tolerance bands for each asset, calculate the German tax and transaction cost of a rebalancing trade, and judge honestly whether rebalancing adds return or only controls risk.
Drawdown budgeting: setting a maximum drawdown and backing out the equity share
Write a maximum-drawdown budget in euros and percent, use historical worst cases for each building block to derive the equity share that fits it, and add a safety margin for a future that may be worse than the past.
Core–satellite in practice: sizing satellites with a tracking-error budget
Size satellite positions with an explicit tracking-error budget, combine several satellites correctly, and run the overlap and information-ratio checks that reveal when a satellite adds nothing but cost.
Glide paths and lifecycle allocation: human capital as a bond and why the path should bend
Derive an equity glide path from the value of your future earnings, see why the path is flat for decades and then falls, and adjust it for a job that behaves like a stock.
Adding diversifiers: gold, commodities, REITs and managed futures, their marginal benefit and when it fails
Calculate how much portfolio volatility a 10 percent sleeve of gold, commodities, REITs or managed futures removes, use the break-even correlation rule, and know the episodes when each diversifier did not help.
Concentration risk: single-stock, employer-stock and sector limits, and the effective number of holdings
Measure how concentrated a portfolio really is with the Herfindahl index and the effective number of holdings, see how idiosyncratic risk falls with position count, and set written limits for single names, employer stock and sectors.
Scenario and factor stress tests for a multi-asset portfolio: rate shock, equity drawdown and inflation surprise
Turn three macro scenarios into euro losses for a five-asset portfolio using portfolio beta and duration contribution, and compare the results with a written loss limit.
Leverage inside a portfolio: leveraged ETFs, volatility drag, margin loans and the lifecycle-leverage debate
Quantify the volatility drag of daily-reset leveraged ETFs, work through the margin-call arithmetic of a securities loan, and weigh the academic case for borrowing when young against its practical failure modes.
A written portfolio-construction document with risk budget, bands, stress-test results and a monitoring dashboard
Assemble the course into a one-document portfolio plan: risk-budget targets, rebalancing bands, concentration caps, stress-test limits and a quarterly dashboard with traffic lights, filled in for a hypothetical portfolio.
Reading Economic Data Releases
Continue with the course Reading Economic Data Releases to understand the macro data that drives the regimes and stress scenarios used here.
View course outline