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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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Asset rate (elasticities ?) of substitution

I'm kind of a newbie in the finance research area. However, I'm working on cross-asset spillovers (transmission of shocks between assets) and my guess is that it comes from investors behaviors. ...
krauuuus's user avatar
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Fitting a Copula with GARCH volatility to stock returns

I have the log-returns $r_{n,t}$ for 3 stocks, $n=1,2,3$, and $t=1,..,T=365$ days, and I want to model the expected shortfall given arbitrary positions on those stocks. I calibrate the GARCH model ...
Xerium's user avatar
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How to create a long-short portfolio on an academic basis

This question may have been asked before, but unfortunately the answers didn't help me very much. It's about how to create long short portfolios. In the papers you often read that they have created ...
Michael123's user avatar
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Idiosyncratic risk calculation - Advanced Portfolio Management (Guiseppe Paleologo)

I'm struggling with the walkthrough of a calculation within this text. For anyone with the book it's an example from section 3.4.2. I will go through the steps here and show where I am getting lost - ...
barnslinger's user avatar
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1 answer
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How do you interpret this data about corporate bonds? [closed]

If I have a corporate bond portfolio that has the following relative to the benchmark (this was given to me as interview question): Given an initial portfolio with the following statistics (as of ...
the_brass_bottle's user avatar
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1 answer
162 views

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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1 vote
2 answers
116 views

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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2 votes
1 answer
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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
2 votes
1 answer
159 views

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 ...
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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
111 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
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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
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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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53 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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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
0 answers
42 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
117 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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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
295 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
4 votes
0 answers
116 views

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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0 answers
63 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
66 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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0 answers
59 views

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
228 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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0 votes
2 answers
315 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
243 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
135 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
99 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
230 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 votes
0 answers
86 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
46 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
939 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
0 answers
147 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
249 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
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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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1 vote
1 answer
147 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
239 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
229 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
516 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
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4 votes
0 answers
165 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
144 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
284 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
0 votes
2 answers
11k 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_{...
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