February 19, 2026 · 1 min read
Regime-Aware Portfolio Construction with CVaR and Factor Caps
A modern portfolio process should optimize expected return under tail-risk controls and explicit factor exposure constraints.
Written by
Muhammad Ahmad Mujtaba Mahmood
Why mean-variance is not enough
Classical optimization assumes stable covariance and symmetric risk. Real markets are non-stationary and losses are asymmetric. Portfolio design needs explicit tail controls.
A more robust objective
Expected return term
Use conservative forecasts, shrink unstable signals, and penalize turnover directly in the objective.
Tail-risk term (CVaR)
Control expected loss in the worst alpha-percent scenarios. CVaR captures crash sensitivity better than variance alone.
Factor exposure caps
Constrain net exposures to market, size, value, and momentum factors. This prevents hidden concentration when one style dominates the sample window.
Regime conditioning
Estimate separate risk structures for calm and stress states. Switch constraint tightness and turnover budgets based on regime probability rather than fixed policy.
Implementation takeaway
Robust portfolio construction is a control system. The winner is not the portfolio with the highest historical CAGR, but the one that survives and compounds across changing regimes.
Author
Muhammad Ahmad Mujtaba Mahmood
Research, engineering, and long-form writing focused on practical systems.
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