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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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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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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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 ...
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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
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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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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
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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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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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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}^...
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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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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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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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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 ...
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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
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Optimal leverage for 5 discrete steps

I received the following problem: Your’re to invest EUR 100 for five years in a portfolio of stocks delivering normally distributed returns with µ = 0.05 p.a. and σ = 0.1 p.a. For each EUR invested ...
Mattiatore's user avatar
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Rebalancing delta hedges has an implied gamma. Is there a good way to estimate an "effective gamma" from a rebalancing strategy?

Intuitively, if we hedge delta and rebalance that delta hedge periodically, we are effectively hedging a bit of gamma with each rebalance. I feel that this would depend on the rebalancing limits and ...
John Matok's user avatar
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Contribution to Drawdown?

I am trying to learn about the contribution to drawdown as a risk measure. While it is common to look at volatility and VaR/CVaR contributions, I have never seen the contribution of each portfolio or ...
AK88's user avatar
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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: ...
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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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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
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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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Quick simple way to aggregate sharpe ratio for a portfolio with derivatives

Suppose I have a portfolio with a mix of long short equity, some bonds, as well as derivatives such as options. Is there a quick way to aggregate sharpe ratio on a portfolio level? I would imagine ...
DLW's user avatar
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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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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
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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
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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
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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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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 ...
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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
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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
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1 vote
3 answers
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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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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
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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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Leveraged Porfolio Hedging

What is the right approach to hedge debt of 1 dollar who's value changes based on a basket composed of: 32 cents of short Asset A 26 cents long Asset B 43 cents long usd The debt is leveraged by 2....
Raginald Avto's user avatar
4 votes
1 answer
215 views

What is Leverage?

What would you consider leverage? I know this may sound like a basic question but I have spoken with several industry professionals with a significant amount of experience and all of them have a ...
AlRacoon's user avatar
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2 votes
1 answer
191 views

How to incorporate ESG in Portfolio Optimization?

I currently have a potential investment universe of several thousand stocks and would like to calculate an optimal portfolio that incorporates ESG criteria as well as risk and return. The model should ...
user61695's user avatar
3 votes
1 answer
195 views

Markowitz portfolio with factor/position constraints

General Markowitz-style optimization (problem objective of $w^T \mu - \lambda w^T \Sigma w$) yields simple optimal weights policy $w \propto \Sigma^{-1} \mu$. However, I would like to add a series of ...
Michael Clinton's user avatar
1 vote
1 answer
363 views

How to correctly use Fama-French factors (from investment portfolio perspective)?

I have several questions regarding Fama-French and other (for instance, BAB) equity return factors for practical purposes (portfolio construction, portfolio risk analysis, portfolio return analysis). ...
rsx's user avatar
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-2 votes
1 answer
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How to calculate portfolio return and risk based on given scenario [closed]

I am interested to invest Rs. 1 lacks in security market. I have securities A and B for this ...
MAC's user avatar
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2 votes
1 answer
169 views

Unexpected Inflation and Asset Allocation

If asset allocation decisions were made prior to the news of unanticipated inflation, how should asset allocators incorporate the fact the inflation is now 5% higher than the 2% inflation target? It ...
AlRacoon's user avatar
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0 votes
3 answers
226 views

compounding component contributions

Say I have a portfolio which contains two components, A & B. Below are the daily contributions to performance (0.02 equals 2%), where the overall portfolio return is equal to the sum of component ...
mHelpMe's user avatar
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mean-variance optimization === max sharpe ratio portfolio?

Noobie here. I just wanna ask a simple question: in the context of portfolio optimization, is Mean-Variance optimization the same as the max sharpe ratio portfolio?
Nygen Patricia's user avatar
3 votes
1 answer
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Sample Variance of Portfolio

Let $w$ denote a vector of portfolio weights, $r_i$ denote the $i$th return vector, $\Sigma$ denote the Covariance matrix of $r_i$ and let $\hat{\Sigma}$ denote the sample covariance matrix of $r_i$. ...
stollenm's user avatar
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Literature about optimal number of stocks in a diversified portfolio

Is there any recent paper on how many assets one should consider for portfolio optimization techniques? I found: – https://www.jstor.org/stable/2330969?seq=1#metadata_info_tab_contents – https://...
Barbab's user avatar
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2 votes
2 answers
168 views

What are the quantitative requirements to distinguish between asset classes?

What are the quantitative criteria to distinguish between asset classes? I ask this as many institutional investors are undergoing strategic and tactical asset class decisions at the moment. How ...
AlRacoon's user avatar
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adjusting treasury futures exposure using micros

I want to decrease my exposure to a 10-year note futures by using 10-year micro futures after volatility-adjusting them. I've calculated that the difference in volatility in the micro has 5.125x the ...
JamieC113's user avatar
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Fx futures pairs

I want to setup a pairs trade with the Japanese yen as the quote currency and Mexican peso as the basis currency. (long MXP vs JPY) 2 /M6J contracts, notional is 1,250,000 JPY = 10966.5*2 = 21933 USD ...
JamieC113's user avatar
3 votes
1 answer
285 views

characteristics of factor portfolios

In the paper Characteristics of Factor Portfolios (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1601414), when it discusses pure factor portfolios, it says that simple style factor portfolios ...
Xiaohuolong's user avatar

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