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Questions tagged [portfolio-management]

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, selection of securities, execution, revision, and evaluation.

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How to compute Value of portfolio with big short positions?

I am a complete beginner. I've got financial economics lecture notes from a few years ago regarding portfolio management. I have trouble figuring out how to compute weights when you have a short ...
jocelinbordet's user avatar
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Reverse optimization: How to generate the expected portfolio returns given the weights and a series of constraints on those weights?

I have the below function in Python. My objective is to back out the expected returns associated with certain portfolio weights given a series of assumptions. From this I want to generate the expected ...
Farrep7's user avatar
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Bonds in a zero interest rate environment

I've been looking at Pension Fund asset allocations. Why would they have any allocation to bonds in an zero interest rate environment? To make the point, let's assume the interest paid on these bonds ...
AlRacoon's user avatar
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When optimizing a portfolio for risk parity, can any portfolio weights turn negative?

As the title reads, when performing risk parity optimization (equal risk contribution amongst all assets to the portfolio volatility), is it possible for weights to turn negative? I understand that in ...
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If an option is undervalued, how does shorting a portfolio generate profit?

I am reading Hull's Options book. He introduces a one-step binomial model and a no-arbitrage argument, using the example shown in the picture below: Consider a portfolio consisting of a long ...
user546106's user avatar
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Optimal weights in portfolio after rebalancing

I have a quite simple question but while looking for answers in research papers I couldn't find anything. The question can be summarized as : if you expect a shock on an asset, why don't you rebalance ...
krauuuus's user avatar
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Measure of hedge efficacy or other means to compare hedging strategies?

Is there a measure of hedge efficacy or another means to compare hedging strategies? I have seen Institutional Investors take very different approaches to tail hedging. On one extreme, I have seen ...
AlRacoon's user avatar
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JP Morgan CreditMetrics

I am trying to apply CreditMetrics on a 2 bond portfolio. As far as I know, this model returns the expected recovery rate and the volatility between those 2 bonds, so my question is how I calculate ...
polo_ hdz's user avatar
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Constructing a Corporate Bond portfolio?

Is it possible to create a corporate bond portfolio such that its yield is 100bps higher that its benchmark, while still outperforming the benchmark (BBG Corporate bond Index)? I guess my question is ...
the_brass_bottle's user avatar
1 vote
1 answer
99 views

Standard deviation of large equal-weighted portfolios

Say I've got a portfolio of shares with the following parameters: Let $n$ be the number of shares in the portfolio, let $\bar\sigma$ be the average standard deviation (volatility/risk) for each share, ...
j3141592653589793238's user avatar
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Commitment devices to remedy investment mistakes?

I'm looking into a new question that came up lately. Some of our clients here are prone to sell their gains too quickly while amassing larger positions of assets that have lost in value. Although this ...
T123's user avatar
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What is Ei in paper "How to Combine a Billion Alphas" by Zura Kakushadze? [closed]

I am reading paper "How to Combine a Billion Alphas" by Zura Kakushadze. In the paper, it has Ei which are the expected returns for alphas. It also has Ri hat as follows. I wonder what the ...
Li Mike's user avatar
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3 votes
1 answer
291 views

Given a statistical model which predicts price, how to determine trading strategy?

Let us assume that we have a statistical model such as ARIMAX that predicts the daily closing price of an asset for the next 30 days. Assume starting capital of $1mn. The model will make new ...
MilTom's user avatar
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1 answer
77 views

Why should investors be compensated for accepting systematic risk? [closed]

Investors should be compensated for accepting systematic risk, as it cannot be diversified. Why do the investors need to be compensated for accepting systematic risk? Because no one can avoid it and ...
Boodombie's user avatar
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What is the correct method to maximize information ratio ex ante of a 150/50 portfolio against the S&P500

I have no problem forecasting and minimize ex ante information ratio for a market neutral portfolio, because the benchmark is just zero and you are just minimizing portfolio variance while maximizing ...
xxanissrxx's user avatar
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50 views

Two different ways to optimize ex-ante correlation of a long / short portfolio

Assuming I am making a long/short portfolio of S&P500 stocks and I would like to use the historical correlations to minimize ex-ante portfolio volatility. I can think of two ways of doing this: ...
xxanissrxx's user avatar
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29 views

Minimizing tracking error for a 150 / 50 portfolio against the S&P500

I am trying to minimize tracking error ex-ante for a 150 / 50 portfolio, eg. it is 150 units long, 50 units short and market exposure of 100 units. It uses all 500 stock in the S&P500. I've ...
xxanissrxx's user avatar
2 votes
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40 views

Intuition behind portfolio weights with lower RMSE but higher variance

I have recently encountered a phenomena in portfolio optimization that has baffled me for days. I was experimenting with different ways of transforming a covariance matrix to get a stable minimum ...
Jay's user avatar
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2 votes
1 answer
108 views

Liquidity Stress Test of Investment fund - Liquidation tracking error

It is my first message on this board, I have hesitated a few days before bothering you with my struggles, but I've seen a lot of very knowledgeable and patient people here willing to help out. I ...
Bourrinou3's user avatar
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1 answer
105 views

When you have negative weights in the context of portfolio construction, what is the correct way normalize them?

For context, I am building an eigenportfolio following the conventions of Avellaneda and Lee Statistical Arbitrage in the U.S. Equities Market (2008), and I get negative weights for eigenportfolios 2,...
Kenfisherman's user avatar
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1 answer
162 views

How do you interpret the portfolio DV01?

I am having trouble understanding the active dv01 of a portfolio? If the active dv01 of a portfolio is -10,000, what does that mean, all else equal? And what are different ways of increasing dv01 of a ...
the_brass_bottle's user avatar
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Evaluating estimate of covariance matrix

I am testing out different methods / shrinkages to estimate a covariance matrix and I am wondering what is the best method of comparing the estimated covariance matrix to the true covariance matrix (...
xxanissrxx's user avatar
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60 views

How to change the covariance matrix for a parallel-shift of the efficient frontier?

I'm trying to obtain a parallel shift in my efficient frontier based on the Merton 1972-parameters. As i think a picture tells you more than 1000 words here is what i tried: The setting of my problem ...
T123's user avatar
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0 answers
63 views

equities hedging betas for a cross-sectional risk model

This question is on equities risk models. I would like to know how to define betas when using a cross-sectional regression approach, rather than the time series approach. My goal is beta hedging of a ...
jam123's user avatar
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portfolio weights based on past returns

In the academic paper Industries and Stock Return Reversals by Hameed and Mian (JFQA,2015) (see picture below), the authors describe a trading strategy based on reversal, which essentially buys past ...
user9875321__'s user avatar
1 vote
2 answers
163 views

Linear programming and factor models vs M-V optimization?

I have been recently researching about portfolio optimization problems and it is unclear to me what is currently the state of art modeling choices when it comes to this topic. On one hand, I've ...
deblue's user avatar
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2 answers
234 views

Why do we need the covariance when calculating portfolio VaR?

I was recently learning about value at risk and how to calculate it, and one of the steps was to calculate the covariance of the returns of the securities making up the portofolio. This makes sense ...
abdelrahman esmat's user avatar
4 votes
0 answers
231 views

Principal Portfolios Prediction Matrix estimation (Bryan Kelly)

I have recently discovered Bryan Kelly's paper on Principal Portfolios (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623983) and had some doubts about the prediction matrix $\Pi$. He defines $\...
SL133's user avatar
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2 votes
1 answer
126 views

Definition of Market-Neutral

I'm reading Qian, Hua and Sorensen's Quantitative Equity Portfolio Management and one part in section 2.3.2 (page 44) states that: "For a long-only portfolio managed against a benchmark, the ...
PerplexedPelican's user avatar
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0 answers
95 views

Difference between the two definitions of Ulcer Index

The Ulcer Index (UI) is defined as follows on page 89 of the book "Practical Portfolio Performance Measurement and Attribution, 2E" by Carl Bacon: $$ UI= \sqrt{\sum_{i=1}^{i=n} \frac{D_{i}^...
cc88's user avatar
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1 vote
1 answer
191 views

Difference between Maximum Drawdown and Largest Individual Drawdown

Bacon in Practical Portfolio Performance Measurement and Attribution distinguishes between the two, specifying that "Maximum drawdown represents the maximum loss an investor can suffer in the ...
cc88's user avatar
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0 answers
80 views

Portfolio factorization for portfolio optimization

I am looking to do some basic portfolio constructions as an experiment to learn more about it. I have been researching a bit and what I have found is that one of the purposes of factors models (Fama-...
deblue's user avatar
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3 votes
0 answers
43 views

Active risk management of private assets

It seems incredibly difficult to not only come up with a list of options for active risk of private assets (Private Equity, Private Credit, Infrastructure, Real Estate, etc.) but also get senior ...
AK88's user avatar
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2 votes
2 answers
795 views

Average drawdown and average drawdown length in Python

I'm trying to use Python to give me more information about drawdowns than just the max drawdown and the duration of the max drawdown. I would like to determine the number of drawdowns that have ...
user89135's user avatar
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1 vote
1 answer
125 views

Shortcut for cutting portfolio volatility

When calculating the portfolio's historical volatility, do I need to factor the volatility of each asset individually and then do a covariance calculation or can I get away by measuring the volatility ...
user1234's user avatar
0 votes
1 answer
225 views

Calculating tangency portfolio weights with the given information? (2risky +riskfree asset)

We have 2 risky and 1 risk-free asset. E1 = 4%, STD1=10% E2 = 5.5%, STD2 = 20% rf=1.5% The covariance matrix and it's inverse are given: ...
JohnFire's user avatar
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1 vote
0 answers
48 views

Calculate fund size given risk limit?

I was listening to a podcast and this guy mentioned the following (literally): The entire group is probably running 800 million at risk. So I'm going to say like call that like a, if you think of ...
AK88's user avatar
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1 vote
1 answer
108 views

Why do better-performing index funds not get a higher weight? [closed]

Most financial advisors recommend to inexperienced investors to put a large part of their investment in broad index funds (e.g. SPY). They will usually reiterate that most actively managed funds ...
user2845840's user avatar
1 vote
0 answers
56 views

Does it make sense to have an allocation to short term fixed income and a leveraged or unfunded position?

This may sound like a basic question but I have seen many large institutional investors have this as part of their asset allocation and am wondering why they do this? Does it make sense to have a ...
AlRacoon's user avatar
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4 votes
1 answer
234 views

Existence of an upper bound for risk-factor betas/coefficients

Theory: Based on Hansen/Jagannathan, the set of means and variances of returns is limited. With $R^f$ as the risk-free rate, $R_i^e$ as the return of stock $i$ in excess of $R^f$ and a stochastic ...
skoestlmeier's user avatar
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-2 votes
1 answer
221 views

Industry best practice for minimizing tracking error [closed]

Lets say I have an alpha generating model that forecasts expected returns for SP500 stocks. I formulate a portfolio with 100 stocks having the highest expected return. What is the simplest way of ...
helloimgeorgia's user avatar
0 votes
1 answer
451 views

Confusion about the proof of Fundamental Law of Active Management in Grinold & Kahn (2000)

I'm reading Grinold & Kahn (2000) for the proof of the Fundamental Law of Active Management. I can't understand formula (6A.20) on page 168, which says: Finally, by assuming that all the signals ...
Gödel's user avatar
  • 253
4 votes
0 answers
150 views

Fama French Model; 5 Factors yield higher alpha than 3 Factors [closed]

I am currently running some Fama French regressions for a number of specified portfolios, consisting of US stocks (for a university level course). The regressions are conducted in R, using the lm ...
14896236842145's user avatar
3 votes
0 answers
140 views

How to deal with benchmark timing in quantitative portfolio management?

In Grinold & Kahn (2000), the authors emphasized the separation of stock selection and benchmark timing in active portfolio management. So if we avoid benchmark timing, the optimal portfolio's ...
Gödel's user avatar
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2 votes
2 answers
280 views

Portfolio construction for almost identical assets

The problem I am looking at concerns the treatment of almost identical assets in portfolio construction. Let us assume that we have two assets, both with a standard deviation $\sigma=0.2$ and a ...
Hans-Peter Schrei's user avatar
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2 answers
10k views

How to calculate the log return of portfolio?

Suppose that we have five trades each day with these returns ($R_{day,trade}$) and we have 300 days in total: $R_{1,1}$, $R_{1,2}$, $R_{1,3}$, $R_{1,4}$, $R_{1,5}$ $R_{2,1}$, $R_{2,2}$, $R_{2,3}$, $R_{...
user2991243's user avatar
2 votes
0 answers
39 views

Determine if stocks are hurt by rates or recession fear

Looking at a portfolio of growth stocks which traded at high multiples until end of last year. Stocks have been underperforming (no surprise there) but I'm trying to find ways to determine, ...
tweedi's user avatar
  • 527
1 vote
3 answers
206 views

Why are monthly active returns averaged? Should they not be multiplied?

I'm looking at this video: https://www.youtube.com/watch?v=fZmuJ2A9TC8 @4:43 but the issue is more general. Here the speaker is taking monthly active returns and averaging them ...
MYK's user avatar
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2 votes
0 answers
380 views

Using the Fama-French 5 factor model in Panel Data

I have a question regarding the use of the FF5 Factors in an industry-fixed effects model. In order to clearify my question I'll post an example of my dataset Note that this is just an example, the ...
finance_renegade's user avatar
1 vote
0 answers
50 views

Simple ways to size position without doing an optimization [closed]

Without doing portfolio optimization, how do long short portfolio managers size their positions?
quant-lab's user avatar

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