# Tag Info

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### Portfolio construction in reality?

Portfolio optimalisation depends heavily on the estimation of the moments (and therefore has HUGE estimation uncertainty). Even though it's useful for comparing and analysing different existing ...
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### Portfolio Risk Decomposition - different methodologies

Different portfolio risk decompositions answer different questions. Before discussing what method to use, first ask why you want a decomposition and what definition of risk are you using. Is the ...
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### How are modern portfolio theory (MPT) and CAPM related?

CAPM states that the expected return of any given asset should equal $ER_i=R_f+β_i (R_m-R_f)$, with α being the error term of the previous equation. Now, as α has an expected value of zero, then only ...
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### Mean Variance Portfolio theory and real-world problem?

Mean-variance (MV) is a framework rather than a prescription. This framework allows one to make, discuss, and defend his investment decision. In practice, there are many ways to make adjustments to ...

### What is smart beta, alternative index, factor investing?

In recent years there has been much attention given to defining indexes other than market-cap based indices. While market-cap based indices approximate the theoretical Market Portfolio enshrined in ...

### What is the intuition of a spread portfolio and how exactly is it constructed?

The first step is to divide a very large number of stocks into deciles (groups having 10% of the stocks) based on some ranked measure (for example book to market or liquidity etc.), then you construct ...
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### What is the intuition of a spread portfolio and how exactly is it constructed?

Does variable $x$ forecast returns? Let's say you have some variable $x$ that you think forecasts returns, and you want to conduct statistical tests of a null hypothesis that $x$ has nothing to do ...
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### Widely accepted methods for coming up with the co-variance matrix of assets?

Multivariate volatility models for replacing the sample covariance matrix with in the mean-variance portfolio selection model: RiskMetrics 1996 EWMA (Exponentially weighted moving average) covariance ...
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### Sharpe Ratio and Sortino Question: Standard practice

Theoretically, Sharpe should be the average of (compounded) excess returns divided by the volatility of the same. It was designed to measure the risk-reward preferring the risk asset to riskless. So ...

### Why is a smaller portfolio norm better?

Norm constraints are motivated by regularisation in regression analysis. L1 and L2 norm are similar to Ridge and Lasso Regression. The author who first introduced this method argued that it will ...
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### Information Coefficient (IC) Formulae Differences

Paraphrasing some quote: "they are different but same but still different" In reality the number of correct bets $N_c$ is the number of times the analyst was correct predicting the ...

### Mean Variance Portfolio theory and real-world problem?

It is well known that the MV-optimal portfolio has some very bad properties in practice: Backtesting: The MV portfolio performs very bad in backtesting applications Diversification: The MV portfolio ...
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### Basic question on Portfolio Theory

Theoretically speaking (as it's done in financial textbooks at b-school level), variance and covariance are calculated on historical performance of asset classes, forward looking returns are CAPM ...

### What is the reference python library for portfolio optimization?

Convex Optimisation - CVXOpt and CVXPy. Textbook by Boyd & Vandenberghe Aside from CVXOPT (known for its cone programming, see http://cvxopt.org/) with extensive documentation by the authors, ...

### Jegadeesh and Titman 1993 Power of their test

Non overlapping periods would make for a far smaller sample

### Is there a way to meaningfully generate daily returns from monthly?

This is a commonly seen problem, and also relates to situations in which one is dealing with some less-liquid underlyings. I will describe a method that you could think of as "stochastic backfilling" ...

### how to calculate daily risk free rate using 13 week treasury bill

user233051 notes that ^IRX is indeed the official discount rate of the US Treasury. So to answer his question we need to exactly understand how the Treasury computes the discount rate. My answer is ...

### Variance Matrix with 'nan' values

This is a common problem in covariance matrix estimation, with several possible solutions. One of the simplest involves two steps: (1) You compute each element of the covariance matrix on a 'best ...

### What is the delta of a portfolio invested in different stocks?

Strictly speaking, you cannot aggregate (i.e. sum) deltas. However, equity traders often provide their net exposure in currency units, which is a useful number. The same reasoning is possible with ...
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### What is 1+ return called?

It's called 'Gross return' (a.k.a. 'Gross Rate of Return'). See Zivot Course Notes Eqn. 1.8 Also, as pointed by Alex C: ... in Statistics it is called a 'link relative' or 'chain relative' (...

### What returns to use?

Since you're looking to summarize the performance of a monthly return series in a single number, it is best to compute the annualized return. This is the standard used in the investment management ...

### % Drawdown on Stock Portfolio to hit Margin Call

Define CoL = cash or loan (cash if positive, loan if negative) MVL = market value of long positions MRP = Maintenance Margin Requirement fraction (=0.3) NetLiq = liquidation value (aka total ...

### What does risk tolerance represent for utility-maximizing optimization with linear constraints?

You cannot eliminate the dependence of a solution on the risk aversion parameter (which this author confusingly calls $\lambda$). Perhaps a source of confusion? Typically $\lambda$ is used to denote ...

### Calculating Correlation of Two portfolios?

You may be over-thinking it. It is a straightforward calculation using matrices, as easy as turning the crank of a sausage-making machine. The standard deviation matrix is ...
The variance part is correct. For the covariance part we can observe the following: There are $n$ variance terms in the $n \times n$ covariance matrix. This implies that there must be $n^2-n$ ...