Glossary term
Portfolio Optimization
Choosing position sizes to balance expected return, risk, and constraints.
Portfolio optimization converts signals into portfolio weights. It asks how much to buy or short, while controlling risk, leverage, turnover, liquidity, sector exposure, and other constraints. The best-looking signal can still create a poor portfolio if sizing is careless.
Example: An optimizer might prefer a smaller position in a volatile stock and a larger position in a stable stock with the same signal score.