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Dynamic Inclusion and Bounded Multi-Factor Tilts for Robust Portfolio Construction

Published: January 8, 2026 | arXiv ID: 2601.05428v1

By: Roberto Garrone

Potential Business Impact:

Builds smarter, safer investment plans that don't fail.

Business Areas:
Asset Management Financial Services

This paper proposes a portfolio construction framework designed to remain robust under estimation error, non-stationarity, and realistic trading constraints. The methodology combines dynamic asset eligibility, deterministic rebalancing, and bounded multi-factor tilts applied to an equal-weight baseline. Asset eligibility is formalized as a state-dependent constraint on portfolio construction, allowing factor exposure to adjust endogenously in response to observable market conditions such as liquidity, volatility, and cross-sectional breadth. Rather than estimating expected returns or covariances, the framework relies on cross-sectional rankings and hard structural bounds to control concentration, turnover, and fragility. The resulting approach is fully algorithmic, transparent, and directly implementable. It provides a robustness-oriented alternative to parametric optimization and unconstrained multi-factor models, particularly suited for long-horizon allocations where stability and operational feasibility are primary objectives.

Page Count
28 pages

Category
Mathematics:
Optimization and Control