Category Archives: Random portfolios
The indices understate the carnage
The first 6 trading days of August have been bad for the major indices, but how variable is that across portfolios? To answer that, two sets of random portfolios were generated from the constituents of the S&P 500. The trading days are 2011 August 1 — 5 and 8. The returns of the indices for … Continue reading
A different take on random portfolios and optimization
In which random portfolios are used as the vehicle for portfolio optimization. The paper The author is William Shaw. The paper goes by the succinct title of “Portfolio Optimization for VAR, CVaR, Omega and Utility with General Return Distributions: A Monte Carlo Approach for Long-Only and Bounded Short Portfolios with Optional Robustness and a Simplified … Continue reading
Posted in optimization, Portfolio Probe, Random portfolios
Tagged portfolio optimization
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What is a good benchmark?
One suggestion is that benchmarks should be: transparent & unambiguous frame-able & customize-able appropriate with full coverage investable The source of this suggestion is Setting the Benchmark: Spotlight on Private Equity. This was discussed by All About Alpha. The paper considers indices and peer groups as benchmarks. They did not consider random portfolios. Let’s look … Continue reading
Risk fraction constraints and volatility
What is the effect on predicted and realized volatility of substituting risk fraction constraints for weight constraints? Previously This post depends on two previous blog posts: “Unproxying weight constraints” “Weight compared to risk fraction” The exact same sets of random portfolios are used in this post that were generated in the second of these. Payoff … Continue reading
Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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Weight compared to risk fraction
How well do asset weight constraints constrain risk? The setup In “Unproxying weight constraints” I claimed that many constraints on asset weights are really a proxy for constraining risk. That is not a problem if weights are a good proxy for risk. So the question is: how good of a proxy are they? To give … Continue reading
Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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Dicing with the market
How to visualize luck when looking for skill. Quantitative Finance just published the paper Dicing with the market: randomized procedures for evaluation of mutual funds by Francesco Lisi. Here is the working paper version. This paper explains one way of using random portfolios to do performance measurement of investment funds. It includes performance measures on … Continue reading
Posted in Performance, Random portfolios
Tagged investment performance measurement, luck versus skill
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Backtesting — almost wordless
On Tuesday I gave a talk at the Thalesians entitled “Effective backtesting”. You can get the annotated slides but below is an almost wordless introduction to backtesting. Introduction Figure 1. When you backtest, you attempt to see how an investment strategy would have worked during some historical period of time. We can think of backtesting … Continue reading
Posted in almost wordless, Quant finance, Random portfolios
Tagged backtesting, outperformance
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Elevated stock correlations
Monday’s Last Word by James Mackintosh in the FTfm states that stock correlations are very high relative to the historical record. He asserts that at least part of this is driven by passive investment — in particular people coming in and out of the market. A consequence of the high correlation is that it reduces … Continue reading
Posted in Fund management in general, Random portfolios
Tagged equity correlations, stock correlations
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