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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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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
76 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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0answers
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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
49 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
80 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
53 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
163 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 ...
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1answer
113 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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49 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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92 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 ...
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73 views

Constructing a portfolio of stocks in Matlab with a specific constraint on weights

I have a problem while creating a portfolio object in Matlab and obtaining the weights of optimal portfolios. I have the data on prices and returns of the stocks over time. Usually, it is very easy, ...
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0answers
47 views

Mean-variance optimization using one-step-ahead forecasts

I need to optimize my portfolio using as expected returns the one-step-ahead forecasts produced recursively by a VAR model. I tried to use ...
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0answers
72 views

optimize.portfolio.rebalancing ROI - transaction costs error

New to using PortfolioAnalytics (and fairly new to R in general) and am encountering an error when running optimize.portfolio.rebalance. Below you can see the code ...
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1answer
176 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
38 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
132 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
881 views

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
838 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}) - ...
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1answer
326 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
383 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
33 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
379 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
679 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 ...
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4answers
155 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
128 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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2answers
158 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
221 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
476 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 ...
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0answers
444 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
560 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
585 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
394 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
252 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
368 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
469 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
80 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: $R_p = x_aR_a + x_bR_b$ ...
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0answers
106 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
210 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
157 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
49 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 ($\alpha_1$, $\...
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1answer
514 views

Portfolio choice problem of a CARA investor with n risky assets

Ok, I am working on a problem that consists of the following: I am looking to solve the portfolio choice optimization problem (maximizing utility with a known utility function) in the case where all ...
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1answer
44 views

Transaction Costs Measure ATOP: What does it mean and exactly measure?

I went through some presentations about LowVol strategies for some indices. In the presentations were tables with average returns, vola, Sharp ratio and ATOP. I have no clue what this ATOP is supposed ...
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1answer
172 views

Asset Liability Management Test Topic Interpretation

I will write a test based on Excel and one of the topics is "The Asset Liability related analysis: including the input assumptions generation, constraints, portfolio optimization analysis and results ...
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9answers
2k views

Why would there be a positive risk-free rate?

Most financial models include a risk-free rate or risk-free asset. Why should there be such thing as a positive risk-free rate? I dont see why an asset would provide a positive (real) return if it ...
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1answer
113 views

Two assets with the same mean and standard deviation - Would there be any benefit? [closed]

If I have two assets in a portfolio with the same standard deviation and mean and the correlation between the assets is 0, theoretically could there be a situation where it would be beneficial to ...
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1answer
160 views

Math basics of Equally-weighted Risk contributions

i'm writing my BA Thesis about "Equally-weighted Risk contributions". Can anyone recommend math books for further understanding of Risk contributions?
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133 views

Quantitative method to select tactical bands for asset allocation

Do you know a study with a methodology for selecting tactical bands (or the allowed deviation from a strategic asset allocation)? Thanks
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2answers
142 views

Controlling portfolio concentration

I'm working with a heterogenous basket of instruments (in volatility terms). Risk parity allocation seems to be useful for the portfolio( * 1/Volatility). However, there are times when the ...