Category Archives: Random portfolios
Expected returns of an investment mandate
What to expect from fund managers who follow your investment mandate. You hope that the fund managers that you hire have skill. But markets are noisy so it is hard to tell skill from luck. It is impossible to tell skill from luck if you don’t know what luck looks like. Here we draw pictures … Continue reading
Alternative equity indices and random portfolios
A study has come out of Cass Business School that investigates a number of ways of building equity indices. Andrew Clare, Nicholas Motson and Stephen Thomas, of course, include market capitalization weighting. A number of schemes that fall under the name of “smart beta” are also included. They compare the indices not only among themselves … Continue reading
Portfolio tests of predicted returns
Exploring the quality of predictions using random portfolios and optimization. Previously “Simple tests of predicted returns” showed a few ways to look at expected returns at the asset level. Here we move to the portfolio level. The previous post focused on correlation. Win Vector Blog points out that gauging prediction quality using correlation can be … Continue reading
Posted in Quant finance, R language, Random portfolios
Tagged alpha generation, MACD, S&P 500
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My missed opportunity with random portfolios
The Observer tells of a ginger tabby named Orlando who selected a random portfolio that won an investment contest. Meanwhile I have a gray tabby here on the desk doing nothing. All that effort to write software to generate random portfolios efficiently when I could have been using cat power instead. Not a single random … Continue reading
Posted in Random portfolios
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A look at historical Value at Risk
Historical Value at Risk (VaR) is very popular because it is easy and intuitive: use the empirical distribution of some specific number of past returns for the portfolio. Previously “The estimation of Value at Risk and Expected Shortfall” included an R function to estimate historical VaR. Generating portfolios A useful tool to explore risk models … Continue reading
Discovering the quality of portfolio decisions
Performance analysis of an example portfolio. The portfolio We explore a particular portfolio during 2007. It invests in S&P 500 stocks and starts the year with a value of $10 million. Initially there are 50 names in the portfolio. It also ends the year with 50 names but has up to 53 names during the … Continue reading
Not fooled by randomness
The paper is “Not Fooled by Randomness: Using Random Portfolios to Analyze Investment Funds” by Roberto Stein. Here is an explanation of the idea of random portfolios. Favorite sentence The real question here is whether we’re actually measuring skill, or these are still measures of performance, so influenced by extraneous factors that the existence of … Continue reading
Sharpe ratios, replacing managers and random portfolios
Two articles in the August issue of Journal of Asset Management discuss topics that relate to random portfolios. Sharpe ratios The first article is “The Sharpe ratio’s market climate bias: Theoretical and empirical evidence from US equity mutual funds” by Sebastian Krimm, Hendrik Scholz and Marco Wilkens (abstract). SSRN claims a version of the paper is downloadable, but … Continue reading
Posted in Performance, Random portfolios
Tagged Monte Carlo in finance, Sharpe ratio
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Random portfolios versus Monte Carlo
What is the difference between Monte Carlo — as it is usually defined in finance — and random portfolios? The meaning of “Monte Carlo” The idea of “Monte Carlo” is very simple. It is a fancy word for “simulation”. As usual, it is all too possible to find incredibly muddied explanations of such a simple … Continue reading
Posted in R language, Random portfolios
Tagged Monte Carlo in finance, personal pension planning
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Random portfolios: 6 steps to a better fund management industry
Only puny secrets need protection. Big discoveries are protected by public incredulity. — Marshall McLuhan Random portfolios have the power to improve the practice of asset management in several ways. Here are six. 1) Measure active managers There is no convincing evidence that more than a handful of funds have consistently outperformed. This should tell … Continue reading
Posted in Performance, Quant finance, Random portfolios, Risk
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