[adios]

How do you select your portfolio? A hypothetical example, if your portfolio consisted of only drug companies your portfolio wouldn't be that diverisified in that drug companies tend to move together (covariance is high). You would probably look for some index or mutual fund that held drug companies instead of buying individual stocks. This would probably lower transaction costs and probably enhance the risk-reward tradeoff. However, you might feel that drug companies in general are undervalued and trade them actively by selling the expensive ones in the group and buying the cheap ones. Most traders I know do this more or less. Identify sectors that they feel they know well and for lack of a better term trade "the crap of of em" i.e. they sell what they perceive as expensive relative to the group and buy what they perceive as cheap. Also most traders I encounter form some sort of long term economic view and make their choices accordingly. They know a few sectors well and decide how they fit into the econimic view that they have.