Define the unit of exposure
A signal, an order and a portfolio weight are different objects. Specify whether a number is a quantity, currency notional, fraction of equity, volatility target or risk contribution. Keep cash and leverage explicit.
A basic long-only allocation has non-negative weights summing to at most one; the remainder is cash. The workbench includes equal weights, inverse-volatility weights and per-asset caps. Its cap helper leaves excess allocation in cash rather than silently redistributing it.
Risk depends on joint behaviour
Volatility weighting is a useful baseline, but it ignores cross-asset dependence. Portfolio variance is wᵀΣw. Estimating and inverting a noisy covariance matrix can create unstable allocations, so compare optimisation with simple baselines and inspect sensitivity to estimation choices.
Inspect paths and tails
Maximum drawdown measures the largest decline from a previous equity peak over the observed path. It is sensitive to the sample and marking frequency. Include the initial capital in the path so a loss at the first evaluation point is counted.
Historical VaR is a quantile of a loss sample. Expected shortfall averages losses in the selected tail. The workbench uses loss = −return: positive values represent losses and negative values represent gains. Neither estimate is a guarantee about the next extreme event.
Align weights with available information
from qtlib.portfolio import inverse_volatility_weights
# training_returns ends BEFORE the next investment decision.
weights = inverse_volatility_weights(
training_returns,
max_asset_weight=0.20,
)
cash_weight = 1.0 - weights.sum()Estimate risk on a historical window, decide the weights and apply them to later outcomes. Account for turnover when moving between allocations. Report the rebalancing convention and what happens when data is missing.
Use a portfolio challenge as a lab
Compare an equal-weight allocation with a concentrated one in Tomorrow Markets. Use the same observed window and inspect return, drawdown and cash. Historical and daily challenges have their own stated rules; record those rules alongside the result.