Questions tagged [asset-allocation]
An investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.
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Strategic asset allocation research
I am currently trying to form an overall asset allocation strategy which combines base strategic allocation and tactical shifts. My model already incorporates the tactical shifts using various factors ...
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2answers
96 views
Optimal investment mix of equity and debt in a single company, HY vs IG
What is the optimal mix of equity and debt that an investor should invest in a single company?
If an investor invests in both the debt and equity of a company, they are in effect de-levering the ...
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1answer
78 views
Expanding window vs Rolling window z-score
I wish to find the z-score of a value measure( e/g P/E ratio) to compare them across asset classes, currently i am using an expanding window z-score to calculate the long-term mean and standard ...
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38 views
Crisis in in-sample period
I am backtesting a value momentum asset allocation strategy and my in sample period is from 2003 to 2011 and out sample from 2012 to 2019. I am optimising a cutoff for value on in sample to allocate ...
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1answer
65 views
Stress Testing approaches at Pension Funds/Asset Management companies
I am looking for resources on Stress Testing for non-banking institution, specifically for long term oriented Asset Management companies, Hedge Funds, Pension Funds, and other Investment companies. ...
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0answers
50 views
Residual Risk and Variance
I've solved part a, but am struggling with b and c. $x_m$ is the market portfolio vector, and I think $T$ should be a diagonal matrix. Any hints greatly appreciated!
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31 views
Cross-Sectional Multi-Index Model
I'm unsure how to find the covariance matrix in part (b) and what the residual deviations are. Any tips on how to tackle this?
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1answer
73 views
Multi-period portfolio allocation: Time-inconsistent approach
Consider a multi-period mean-variance portfolio optimization so that at time $t$ I find the strategy that maximizes my expected terminal wealth $X_T$, subject to a constraint on risk,
\begin{align*}
\...
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2answers
602 views
Implementing leveraged Risk Parity Portfolio using Direxion 3X ETF
The "common man" version of a leveraged Risk Parity portolio (40% stocks and 60% long term bond, Quarterly Rebalanced) can now be easily implemented using the 3X leveraged ETF's (UPRO=stocks, TMF=...
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68 views
Black-Litterman proof with P=I and Omega=tau*Sigma
Elsewhere on this site (link), Richard notes that
\begin{equation}
\Pi_{BL} = \frac{1}{2} \Pi + \frac{1}{2}Q,
\end{equation}
so long as we set $ P = I $ (where $I$ is the identity matrix) and $\Omega ...
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2answers
241 views
Calculate asset allocation given “long and short” optimized portfolio weights
If the amount of capital that has to be allocated for each asset given the "long only" optimized portfolio weights is:
...
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2answers
1k views
How to calculate “portfolio cumulative return” from individual price data and weight of them?
I'm trying to run backtest in a vectorized way using Python Pandas and need to calculate a portfolio cumulative return from price data and weight of asset data.
I ...
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1answer
106 views
MPT Efficient portfolio /Asset allocation
When finding the optimal allocation using markovitz, the model will return '0' weights for assets that are "inefficient". What is the standard way for dealing with these weights if all assets have to ...
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21 views
Reference request: Terminal wealth distribution including deterministic contribution
I'm looking into some classical utility maximization problems. In particular, I'm interested in looking at the wealth evolution where you invest your money across $n$ assets and each time period you ...
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1answer
82 views
Dynamic asset allocation strategies using a stochastic dynamic programming approach
I am currently reading Gerd Infanger's Chapter 5 on "Dynamic asset allocation strategies using a stochastic dynamic programming approach" in the Handbook of Asset and Liability Management edited by S....
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1answer
97 views
Preference between low (zero) and negative correlation
I am trying to create an artificial score grading user's portfolio correlation. In terms of diversification, lower correlation is obviously better. However, should negative correlation get a higher ...
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0answers
141 views
Problems with Black-Litterman: negative portfolio weights, and very poor returns
I am trying to implement the Black-Litterman model using own-defined views matrix (from consensus analysts). However, I have encountered the problems of negative portfolio weights in some periods, and ...
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2answers
349 views
Risk Parity / Equal Risk Contribution with Tail Risk Measures
Risk Parity or (synonymous) Equal Risk Contribution is an approach to portfolio construction which could work in theory with a broad class of risk measures. Yet, all references I have found so far ...
3
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1answer
254 views
Ledoit Wolf shrinkage with constant correlation prior with tawny and Riskporfolios
I am trying to use R to perform the shrinkage of covariance matrix towards constant correlation as defined in 'Honey, I Shrunk the Sample Covariance Matrix'.
I see there are two packages where this ...
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0answers
51 views
Looking for: List of 30 top-performing value investors in the US (AUM 100USD mn+; 10 years)
we are currently looking to build another database sourced by crawling the SEC (freely available at SimFin).
Our goal is to build a monthly updating database showing the holdings of the top value-...
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0answers
157 views
Mean Variance Optimization of 2000 pairs of securities (Python)
I would like to take the opportunity to ask for your help on an assignment I'm trying to complete.
For this 'Modern Robo Advisory' course we are asked to solve a (target) goal-based investment ...
3
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1answer
192 views
Why is this utility function not picking up its penalty?
I was reading this seminal paper by Infanger. On page 40, Figure 11. was quite interesting. In particular I was interested in the top one, 19 Years and I wanted to reproduce this plot. To give some ...
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0answers
45 views
Is the 'constant weight in the risky asset' portfolio-strategy self-financing?
My question concerns a topic in quantitative finance that I feel is often brushed under the table: is a given strategy self-financing.
We have two assets, one risky and one riskless, defined by the ...
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1answer
142 views
In practice, how do pension plans determine their risk appetite?
While I understand DB pension plans tend to use an ALM and surplus management framework to determine their asset allocation and risk/return objectives, I am wondering how in practice they determine ...
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4answers
1k views
Why is Markowitz portfolio optimisation so popular considering it is worse than an equal weighted portfolio?
The original paper by Markowitz from the '60s has ~20,000 citations (definitely popular). However several papers I came across show that a $\frac{1}{n}$ asset allocation gives higher Sharpe ratios (...
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2answers
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Equivalent to Matlab's financial toolbox in python?
I've been working on making an asset allocation model that requires I price a lot of financial instruments (i.e. bonds, options) and optimize based on a certain constraint. I was originally doing this ...
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1answer
1k views
Calculating alpha and its meaning
According to wikipedia, CAPM model is described by:
$E(R_{i})=R_{f}+\beta _{{i}}(E(R_{m})-R_{f})$
And according to website such as http://investexcel.net/jensens-alpha-excel/,
$\alpha = E(R_{i}) - ...
2
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1answer
477 views
Minimize overall portfolio turnover under constraints
Assume I have M portfolios, each of them can be represented as a T by N matrix, where N represents number of stocks traded and T represents number of days. For each portfolio matrix, each row is under ...
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2answers
502 views
Does CAPM hold for markets with two risky assets?
Presentations of the CAPM often include statements similar to this:
While idiosyncratic risk can be "diversified away", systematic risk cannot, which is also expressed in the CAPM, which states ...
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0answers
34 views
Target date funds - glide path quantitative foundations?
Are there any introductions that show an academic proof or quantitative process for determining the proper asset allocations for a glide-path in a target date fund?
I've been trying to find something ...
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2answers
482 views
Is mathematical finance relevant in asset managament?
I was hoping to consult on the relevance on the relevance of mathematical finance in the asset management business. Traditionally, mathematical finance focuses more on topics related to stochastic ...
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1answer
920 views
PortfolioAnalytics [R] - optimize.portfolio.rebalancing error
New to using PortfolioAnalytics (and fairly new to R in general) and am encountering an error when running optimize.portfolio.rebalance -- see below:
Error in ...
3
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4answers
162 views
What ultimately determines trading costs?
In equity markets, there are obvious transaction fees such as brokerage, commission fees etc.
But if I wanted to do a more in-depth analysis of the determinants of transaction costs, what would be ...
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1answer
129 views
Simple simulation model of bond plus cash returns
Is there a robust way to model 'bond plus cash' simulated returns, say in Excel, for an asset allocation problem between stocks vs bond plus cash?
For equity, ...
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3answers
195 views
Portfolio optimisation by asset allocation
I would like to optimize a portfolio allocation (maximizing the exposure or the expected return), but with asset constraints. (some parts of my portfolio cannot exceed a certain minimum or maximum). ...
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1answer
320 views
How can I set portfolio weights inverse to volatility, with constraints and target volatility, using nonlinear optimization?
There are multiple sources that describe using a nonlinear optimization to risk budget a portfolio, with a portfolio target volatility. For example, see pages 16 and 17 of https://papers.ssrn.com/sol3/...
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2answers
533 views
Asset allocation problem using Hidden Markov Model
I am recently getting more interested in Hidden Markov Models (HMM) and its application on financial assets to understand their behavior. But what captured my attention the most is the use of asset ...
2
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0answers
547 views
Modelling log-returns and calculating the portfolio return
I know this might be a trivial question, however, I would be grateful for some clarification. I am working on weekly log-return data, doing volatility-foracasting using GARCH models and then using ...
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0answers
606 views
backtest asset allocation strategies
I've searched the site but haven't found an easy way to backtest my personal portfolio allocations. Suppose I want to know the total return for the following portfolio from Jan 1, 2009 to Dec 31, 2014:...
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2answers
787 views
Monte Carlo based mean variance optimization
I was asked this question in an interview some years ago. It struck me as a poorly formed question. I thought I would put it out there to the community to see if I just simply missed something.
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3answers
465 views
What is smart beta, alternative index, factor investing?
What is smart beta, alternative index, factor investing? Are they basically the same thing? Construct a benchmark index using schema other than market cap?
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1answer
1k views
Simulating returns from ARMA(1,0)-GARCH(1,1) model
I want to obtain a simulation of one-step ahead forecasts of stock returns process governed by ARMA(1,0)-GARCH(1,1) process. The returns are of form:
$x_t = \mu + \delta x_{t-1} + \sigma_t z_t$
From ...
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0answers
288 views
Asset allocation and GARCH models
I am trying to solve an asset allocation problem and I am having some troubles grasping the concept. I am working with excess returns on 4 stock indices and I am obtaining the excess returns forecasts ...
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1answer
408 views
How to answer this interview programming question about drawdowns?
I saw this question as an interview, and to be honest, I have no idea what it's even asking for:
Write a function (in R or Python) that finds the stock drawdown which
will trigger a rebalance, if ...
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2answers
567 views
High values of skewness and kurtosis of realized protfolio returns
I am investigating some asset allocation strategies and I am wondering about the results I obtain. I am working on monthly and weekly data of the same stock indices (SP500, FTSE 100 etc). And when I ...
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1answer
84 views
Understanding portfolio weights and purchasing stock in modern portfolio theory
Recently I've been learning about the markowitz algorithm. It's pretty interesting, but I'm curious how we apply this in practice. Lets say I have some optimal portfolio:
$R_p = x_aR_a + x_bR_b$
...
5
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1answer
198 views
Reference Request: Horse Race for Portfolio Allocation
Probably the most popular horse race study for portfolio strategies is
Optimal versus Naive Diversification: How Inefficient Is the 1/N Portfolio Strategy?, with DeMiguel, L. Garlappi and R. Uppal. ...
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3answers
227 views
Multi-asset class allocation
How to allocate asset classes in a multi-asset portfolio?
An institutional client needs to meet his pension liabilities, and suggested a multi-asset-class strategy. I'm trying to find ideas to pitch.
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1answer
178 views
bootstrap asset allocation
I want to ask if the bootstrap method for asset allocation is preferable. For instance, suppose that we have data for the past returns for two stocks. Is it wise to generate the efficient frontierby ...
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1answer
52 views
Portfolio of Assets
The following represents a model for an economy.
At time $t=0$, four assets have the value $X_1= £5$, $X_2=£5$, $X_3=£10$ and $X_4=£4$.
Three possible states of the world exist ($\alpha_1$, $\...
