Portfolio Construction & Risk Allocation
Two portfolios can hold similar assets while concentrating risk very differently. The study compares both weights and risk contribution, then tests whether sophisticated optimisation earns its complexity.
Central findingIn the development sample, simple 60/40 led while most sophisticated methods were statistically indistinguishable from equal weight on Sharpe; minimum variance mainly reduced risk rather than raising return.
Evidence
The result in context
- ETF proxies
- 9
- Development 60/40 Sharpe
- 0.82
- Minimum-variance development volatility
- 3.66%
- Maximum-Sharpe average monthly turnover
- 39.55%
Question
Which portfolio-construction methods remain useful once estimation error, concentration, costs and changing market regimes are taken seriously?
A comparison of simple and optimised allocation methods under estimation error, concentration, turnover, stress periods and frozen confirmation.
Comparison
Weights are not the same thing as risk
The study compares equal weight, traditional 60/40, inverse volatility, minimum variance, risk parity, hierarchical risk parity and maximum Sharpe portfolios across nine liquid asset proxies.
Risk contribution estimates how much each holding contributes to total portfolio volatility. A small weight can still dominate risk if the asset is volatile or highly correlated with the rest of the portfolio.
Development
Complexity did not guarantee a better result
From the common 2011 start, 60/40 produced 8.93% CAGR and 0.82 Sharpe. Most sophisticated methods were statistically indistinguishable from equal weight on Sharpe.
Minimum variance delivered 3.66% annual volatility and a −13.10% drawdown, showing a clearer risk-reduction role than a return-enhancement role.
Portfolio method explorer
Weight is not risk contribution
Compare source-backed portfolio-level results by method and period.
- CAGR
- 4.17%
- Sharpe
- 0.39
- Volatility
- 8.85%
- Maximum drawdown
- −18.54%
- Turnover
- 3.10%
- Effective assets by weight
- 8.99
Equal capital does not create equal risk: equity and real-asset exposures still dominate.
The figures on this page show asset-level weights and risk contributions. The explorer reports source-backed portfolio-level metrics only.
Frozen confirmation
A strong short period is not proof of superiority
From 2 January 2025 to 24 August 2026, a 10% volatility-targeted maximum-Sharpe portfolio produced 26.13% CAGR and 1.82 Sharpe, versus 19.05% and 1.61 for equal weight.
Minimum Variance Shrinkage recorded the shallowest confirmation maximum drawdown at −2.32%. The period is short and was not treated as a new optimisation sample. Its 1.82 maximum-Sharpe result is context, not a superiority claim.
Limitations
What this evidence does not establish
- The confirmation period is too short to establish stable method rankings.
- Optimised weights remain sensitive to estimated returns, covariance and implementation assumptions.
- The nine-ETF universe is selected ex post and remains exposed to product-survivorship bias.
- SHY is a simplified cash proxy and hurdle rather than a complete financing model.
- Transaction costs and financing assumptions are stylised rather than broker- or mandate-specific.
Source and reproducibility
Trace the evidence
Source code, evaluation outputs and supporting material are available in the repository.
View repository- Risk contributionsoutputs/figures/risk_contributions.pngCommit / evidence ID: 9a40b2bd97ca3e54ef105a964ff9f375f98be7f4
- Average weightsoutputs/figures/average_weights.pngCommit / evidence ID: 9a40b2bd97ca3e54ef105a964ff9f375f98be7f4
- Stress-period comparisonoutputs/figures/stress_period_comparison.pngCommit / evidence ID: 9a40b2bd97ca3e54ef105a964ff9f375f98be7f4
- Frozen protocolconfig/frozen_protocol_v1.jsonCommit / evidence ID: 9a40b2bd97ca3e54ef105a964ff9f375f98be7f4