I might be interested in optimizing an stock investment portfolio. With or without using programming, is there an article I should refer to optimize my portfolio and help me taking good investment decision?
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$\begingroup$ @Emma For me there's 4 kinds of trading, i.e. investment, swing, day trading and high-frequency. I am trying to find a strategy which will optimize my portfolio return based on investment trading in practice. Does it enough or I need to add more information? It is appreciate you can give me a feedback on the quality of my question. $\endgroup$– fgauthFeb 22, 2019 at 3:14
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2 Answers
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What does it mean that you will optime portfolio "without programming"? Does that mean that you will do calculations by hand???
Articles will not help you since every article you will be able find is based on optimization models in which market data will somehow be involved. That you cannot do "without programming".
Maybe you should think about finding online models where someone else have done the programming part for you. Look for instance at:
https://www.portfoliovisualizer.com/optimize-portfolio#analysisResults
This is a simple Mean-Variance model you can read about here: https://www.math.ust.hk/~maykwok/courses/ma362/Topic2.pdf
or less technical: https://www.effisols.com/basics/MVO.htm
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The scope of your question is quite unclear to me.
You seem to mention trading. If you have multiple trading strategies (that you think are good, and reasonably uncorrelated) and you want to trade them as a portfolio,
a commonly used criterion is to allocate capital to each strategy in proportion to the inverse of the strategy's standard deviation. So if for example your Strat1 has $\sigma$ of 10% a year and Strat2 has $\sigma$ of 20%, you would allocate (1/0.1)(1/0.1+1/0.2) = 2/3 of your capital to Strat1 and the remaining 1/3 to Strat2.
This is the simplest optimization you can do and it can be done on the back of an envelope. If you want to get fancier you would need to know the correlations among the strategies, then you can calculate an ERC (Equal Risk Contribution) solution, which can be done in a spreadsheet.
On the other hand, if you just want to help me tak[e] good investment decisions then you don't really need optimisation and calculations. The insights of Portfolio Theory can be summarized as:
(0) Make sure you know the risk(s) of your portfolio and that you are comfortable with those risks (not too much, not too little).
(1) Make sure your portfolio is well diversified ("diversification is the only free lunch")
(2) Minimize transaction cost, taxes and management costs. In particular ignore the advice of Wall Street, CNBC etc.; they just want you to transact, to be always buying and selling, because it is in their interest. Only trade as needed. ("Your portfolio is like a bar of soap, the more you touch it the less you will have")
(3) The Market Portfolio, while not necessarily optimal, is probably close to the theoretically optimal portfolio and can serve as a reasonable starting point and benchmark.
