Abstract
This chapter delves deeply into an area of rules based portfolio construction which has largely been overlooked. We discuss the impact of screening and weighting decisions on portfolio characteristics and performance. We show how this occurs through the effect of screening and weighting decisions on the maximum effective multiplier of a portfolio. Furthermore, we demonstrate a closed form solution to the maximum effective multiplier under a certain set of conditions. Importantly, we highlight that screening and weighting decisions interact, and should therefore not be made independently. Ultimately, the performance and characteristics of a portfolio is linked to the combined effect of screening and weighting decisions through the maximum effective multiplier.
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