The professional management of an investment portfolio of various securities (shares, bonds and other securities) in order to meet specified investment goals. The process includes the specification of investment objectives and constraints, choice of asset mix, formulation of portfolio strategy, ...

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32
votes
12answers
16k views

Why does the minimum variance portfolio provide good returns?

I've been a researching minimum variance portfolios (from this link) and find that by building MVPs adding constraints on portfolio weights and a few other tweaks to the methods outlined I get ...
22
votes
6answers
10k views

What type of investor is willing to be short gamma?

As far as I understand, most investors are willing to buy options (puts and calls) in order to limit their exposure to the market in case it moves against them. This is due to the fact that they are ...
18
votes
2answers
898 views

Diversification, Rebalancing and Different Means

I have found many financial authors making generalizations about GM and AM but they are wrong in certain circumstances. Could someone explain their reasoning? My fact why they are wrong is based ...
14
votes
5answers
6k views

portfolio optimisation with VaR (or CVaR) constraints

I would like to optimize a portfolio allocation (maximizing the exposure or the expected return), but with VaR or CVaR contraints. (some parts of my portfolio cannot exceed a certain VaR) How can I ...
14
votes
4answers
2k views

What books should any quantitative portfolio manager or risk manager have as reference? [closed]

I'm interested to know what are the critical reference texts you rely on for portfolio or risk management? I mean those texts that you come back to because they are chock full of insight and know-how. ...
13
votes
3answers
2k views

Why do expected return models and risk models use different factors?

This is a question responding to weekly topic challenge. I happen to see an interesting question from SYMMYS by Michael Kapler. I always approached expected return and risk modeling as separate ...
13
votes
3answers
2k views

Role of skewness in portfolio optimization?

What is the role of skewness in portfolio optimization?
12
votes
4answers
6k views

R: Fast and efficient way of running a multivariate regression across a (really) large panel (First pass of Fama MacBeth)

I am attempting to run a rolling multivariate regression (14 explanatory variables) across a panel of 5000 stocks: For each of the 5000 stocks, I run 284 regressions (by rolling over my sample ...
11
votes
2answers
2k views

robust portfolio optimization re-balancing with transaction costs

The optimal re-balancing strategy takes account of factors including i) objective function, ii) current portfolio weights, iii) expected return vector containing updated views/alpha forecasts, iv) ...
11
votes
3answers
3k views

How do I calculate the skewness of a portfolio of assets?

I need to calculate the skewness of a portfolio consisting of 6 assets. I know that for that I would need the co-skewness matrix between the assets. Does anybody know the formula for co-skewness or ...
11
votes
3answers
237 views

Does entropy pooling apply to distributions with time-varying drift?

I have a returns process that is drawn from a normal distribution with a nonlinear time-varying drift, so I was wondering if the entropy pooling method still applies or if I need an invariant ?
11
votes
1answer
290 views

penalizing negative skewness by linking $U(\mu)$ and $U(\Sigma)$

Consider $U_1(\mu,\Sigma)$ and $U_2(\mu,\Sigma)$, where $U_1(\mu, \cdot) = U_2(\mu, \cdot)$, $U_1(\cdot, \Sigma) = U_2(\cdot, \Sigma)$ such that \begin{equation*} arg\inf\limits_{\mu \in U_1(\mu, \...
10
votes
2answers
819 views

How to compute performance attribution between daily rebalanced strategies?

I have a daily rebalanced portfolio of several strategies. After one month, I now want to attribute the performance to the different strategies. There are several ways to do it. For instance one ...
10
votes
2answers
703 views

Are there any tools or useful algos for identifying corner portfolios?

Let's say I am performing mean-variance optimization subject to some weight constraints. I'd like to identify the set of corner portfolios so that I can interpolate the entire efficient frontier. A ...
10
votes
2answers
1k views

Risk Budgets with Target Portfolio Volatility

I'm working through the implementation of a risk budgeting approach as described in the recent Roncalli paper. The idea is that the portfolio manager sets a contribution of total portfolio volatility ...
10
votes
1answer
576 views

Is creating constrained random portfolios a hard problem?

Creating random portfolios with weights $x_i$ can be thought of as sampling from the surface of a simplex given by $$Ex = f$$ and $$Ax \le b$$ Where $E$ and $A$ are constraint matrices for equality ...
10
votes
0answers
324 views

Optimization procedure for entropy pooling

I was wondering if those who used the entropy pooling code provided by Attilio Meucci had issues with the optimization procedure (especially regarding the fminunc function in Matlab). When I stress ...
9
votes
4answers
1k views

Why shrink the covariance matrix?

I'm trying to understand why it's useful to shrink the covariance matrix for portfolio construction or in fact general. Think I missing something. I know if you have 5,000 stocks it's a lot of ...
9
votes
3answers
844 views

Alternate money management strategies to Kelly?

Other than Kelly (or fractional derivatives), are there other money management strategies in wide use among quant funds? Certainly Kelly is mathematically optimal, but perhaps there are other ...
9
votes
1answer
146 views

Are there references about liquidation, transaction, market impact costs in portfolio optimization

I am looking for some references treating of what I would call liquidation cost market impact cost transaction cost(*) in the usual "portfolio optimization problem under linear constraints". Let ...
9
votes
0answers
189 views

Real world application of stochastic portfolio theory

There is a branche of stochastic portfolio theory (see also this question). Fernholz and Karatzas have published research in this field (e.g. "Diversity and relative arbitrage in equity markets") and ...
9
votes
0answers
700 views

Testing Valuation, Size and Momentum (proprietary factors) from 1988-2013: No evidence of driving cross-sectional returns

I am currently testing whether three proprietary factors - Valuation, Size and Momentum - explain cross-sectional returns. A sample of 3000 securities was tested using Fama-MacBeth two-pass ...
8
votes
3answers
1k views

On the interface between Quant finance and actuarial-science/insurance-math

Actuaries (at least in Europe) are frequently severily lacking in quant finance topics. At best they are familiar with B&S model. People going into quant finane or striving to become a quant on ...
8
votes
2answers
552 views

How to shift amongst asset classes in response to relative value views?

I am designing an asset allocation strategy/fund which invests in four asset classes (via four independent sub-funds): Domestic equity International equity Domestic fixed income Foreign currencies ...
8
votes
2answers
758 views

Why do low standard deviation stocks tend to have superior future returns?

I've recently stumbled on something that really surprised me. These papers (1, 2) find that past standard deviation of returns is inversely related to future returns. That is, portfolio of low ...
7
votes
2answers
1k views

Which algorithms do robo-advisors use?

Some pundits claim that there is a revolution in portfolio management under way: The rise of the robots, a.k.a. robo-advisors. The most well known are Betterment.com, FutureAdvisor, Schwab Intelligent ...
7
votes
3answers
1k views

cointegration applied to Portfolio Construction & Risk management

There are all sorts of applications of cointegration to generating alpha on mean-reverting timeseries: comparing spot vs. futures, bond spreads, identifying mean-reverting residuals, etc. But there ...
7
votes
2answers
1k views

optimal re-balancing strategy with asynchronous alpha signal

You want to construct an optimal portfolio. Let's say you have an alpha signal that arrives with some period (say quarterly). The alpha signal predicts arithmetic returns one-year ahead. You have ...
7
votes
1answer
728 views

How to run an asset replication regression?

I am doing extensive research on portfolio replication and was hoping to get some help with some problems I am encountering. I am running a regression between 2 assets that I believe replicate ...
7
votes
0answers
162 views

Computing Value at Risk for portfolio in R

I know how to compute VaR with long positions using PerformanceAnalytics. What about a portfolio consisting in two equities A and B, 100 USD long positions in each, and 2 stock options for the same ...
7
votes
0answers
327 views

Optimization: Factor model versus asset-by-asset model

In portfolio management one often has to solve problems of the quadratic form $$ w^T \Sigma w + w^T c \rightarrow Min $$ with portfolio weights $w \in \mathbb{R}^N$ a constant $c \in \mathbb{R}^N$ and ...
6
votes
3answers
1k views

What position-sizing methods are used in futures trading?

Beyond optimal / partial f and a few other older methods, there's very little information out there for futures trading.
6
votes
3answers
420 views

Should the average investor hold commodities as part of a broadly diversified portfolio?

Many mutual funds sell "asset allocation" products which include appropriately sized investments in a variety of asset classes meant for a prototypical investor. Some of these, such as PIMCO, even ...
6
votes
4answers
829 views

Is there anyone still using Markowitz modern portfolio theory?

I was reading about the MPT (Use standard deviation as risk measure) on "Mathematics for Finance by Marek Capinski". I was just wondering is there anyone actually applying this theory to their ...
6
votes
2answers
2k views

Comparing MVO with Resampled Efficient Frontier

My question: How can I compare the Resampled Frontier (REF) to the standard MVO frontier when I have been provided with $\mu$, $\Omega$, and don't have access to true future data to test real out of ...
6
votes
1answer
2k views

How can I use Entropy-pooling of Atillio Meucci to constuct a portfolio?

I am trying to get my hands on Entropy Pooling which was introduced by Meucci in this paper. As an example, assume I want to construct a portfolio with five stocks and I have my view on CVaR. How ...
6
votes
1answer
411 views

Calculate turnover for portfolio

I am trying to calculate the turnover for a portfolio strategy. First I generate some random data and assign it dates: ...
6
votes
1answer
481 views

How can I simulate portfolio risk (diversification) with a 'Wheel of Fortune' like investment options/returns?

Say I have 6 possible investment options with the following probability of success and the corresponding returns: ...
6
votes
1answer
148 views

How to perform risk budgeting for non-linear portfolios?

I am using this question to compute optimal weights following a risk budgeting approach. The problem is I am using non-linear portfolios (options,equity,fixed income,fx). What I am looking for is ...
5
votes
2answers
186 views

Portfolio Optimization to include ALL Securities?

I'm currently optimizing portfolio weights for an investment team with N stocks. We buy stocks with a conviction it will generate a return and it is up to me to determine weighting. However, with ...
5
votes
1answer
178 views

Can I add the greeks of individual postions to obtain greeks for the portfolio

I understand that the delta of an option portfolio is just the sum of the deltas of the individual option positions. What about the other Greeks like gamma and vega? Do the vega and gamma of a ...
5
votes
1answer
616 views

Quant PMs need to know the following… [closed]

To the degree in which it's possible, I'd like to know what the community believes are the objective skills/knowledge required to run a successful Quant book. I'm not interested in strategies, ...
5
votes
1answer
1k views

Robust Bayesian portfolio optimization in matlab?

I am working through this paper. I want to implement the robust Bayesian optimization (see pages 6 onward) in Matlab using fmincon. Here is a brief overview of my problem: Let $\alpha$ be the ...
5
votes
1answer
108 views

How to calculate Skulls Financial Turbulence for one asset?

I have just read this paper http://www.cfapubs.org/loi/doi/abs/10.2469/faj.v66.n5.3 In the paper they define financial turbulence formula as: Could anyone help me calculate/understand this formula,...
5
votes
3answers
388 views

Platform for Quantitative equity portfolio

What are the most popular platforms used for quantitative equity portfolio management/research? I've only used Barra so far for their factor models. Is there any specific feature or model you think ...
5
votes
1answer
246 views

How to build an electricity portfolio for an electricity production company?

I am referring to an electricity production company. Company is located in AsiaPac. The power is generated using Natural Gas fired combined-cycle power plants. Then this electricity is distributed to ...
5
votes
0answers
304 views

Analyzing the angle between vector of weights and vector of returns in mean-variance optimization

I am using the paper "A Sharper Angle on Optimization" by Golts and Jones (2009) as a basis for my (minor) masters thesis in mathematical finance. The paper focuses on the mean-variance analysis of ...
5
votes
0answers
519 views

Is there a standard method of scaling alpha forecasts to t-cost estimates?

Given a set of monthly alpha forecasts (i.e. standardized z-scores from a multi-factor return model) and a non-linear market impact model (or more specifically, its piecewise-linear approximation), is ...
4
votes
4answers
820 views

What to use as portfolio diversification measure?

Suppose that we have a portfolio of $n$ assets. A perfectly diversified portfolio is one in which each asset has equal weights, i.e. each asset has weight $\frac{1}{n}$. Of course this is usually not ...
4
votes
1answer
296 views

Historical Financial Statement to Backtest in R

I would like to preface this by saying I am preparing for an upcoming internship this summer so I am extremely new to Quant Finance. At my university we have access to Datastream by Thomson Reuters ...