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The Macroaxis Efficient Frontier is an implementation of Modern Portfolio Theory (MPT) and Capital Asset Pricing Model (CAPM). We are not trying to determine a unique Market Portfolio, but rather our investor landscape contains portfolios that our community holds and analyzes on the basis of risk and return. The best performing portfolios (in green) are shaping up the efficient frontier. Eventually the frontier line will become a solid line that will be similar to what the actual theory assumes -- any asset is infinitely divisible.
The risk of a portfolio comprises systematic risk, also known as undiversifiable risk, and unsystematic risk which is also known as idiosyncratic risk or diversifiable risk. Systematic risk refers to the risk common to all securities. Unsystematic risk is the risk associated with individual assets. Unsystematic risk can be diversified away to smaller levels by including a greater number of assets in the portfolio (specific risks "average out"). The same is not possible for systematic risk within one market. Depending on the market, a portfolio of approximately 30-40 securities in developed markets such as the UK or US will render the portfolio sufficiently diversified to limit exposure to systemic risk only. In developing markets a larger number is required, due to the higher asset volatilities.
A rational investor should not take on any diversifiable risk, as only non-diversifiable risks are rewarded within the scope of this model. Therefore, the required return on an asset, that is, the return that compensates for risk taken, must be linked to its riskiness in a portfolio context - i.e. its contribution to overall portfolio riskiness - as opposed to its "stand alone riskiness."In the CAPM context, portfolio risk is represented by higher variance i.e. less predictability. In other words the beta of the portfolio is the defining factor in rewarding the systematic exposure taken by an investor.
All this basically implies that, for a given amount of risk, the portfolio lying on the efficient frontier represents the combination offering the best possible return. Mathematically the Efficient Frontier is the intersection of the set of portfolios with Minimum Variance (MVS) and the set of portfolios with Maximum Return.
Use alpha and beta coefficients to find investment opportunities after accounting for the risk Find Alpha
Evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals, sectors and families Research Equities
Find insiders across different sectors to evaluate their impact on performance and growth of their entities Research Insiders
Before comparing or considering investments, it is better to perform a risk-adjusted return calculation that will adjust the returns according to how risky the investments are. Analize Watchlist
An investor can reduce portfolio risk simply by holding instruments which are not perfectly correlated. Correlation analysis module will build a two-dimensional matrix that shows correlation coefficient between pairs of securities. The cells in the table are color-coded to highlight significantly positive and negative relationships. Run Correlations
Portfolio Suggestion is our flagship module.
Based on the implementation of Mean-Variance optimization, the module simply attempts to suggest to you
(in the context of Modern Portfolio Theory) a better portfolio taking your current portfolio as an input.
This technique is not new. Institutional money managers and private financial advisers have been using
this technique for many years. But unlike professional money managers, Macroaxis
is not a store with a predefined pool of mutual funds (or a selected set of model portfolios)
and does not limit the landscape of market possibilities. Plus, our optimization algorithm
goes a little further to provide you with more than one educated option to create efficient
portfolio based on your unique appetite for risk.
Even though we strongly believe in Efficient-market hypothesis our suggestion algorithm uses the power of mathematics to synthetically manufacture efficient portfolios based on market risk reduction through examining of asset correlation and mean-variance optimization.
The output of the portfolio suggestion module is segregated into two distinct categories, so that it is easier for the investor to select the right option.
We provide a very simple four-star optimization methodology.
A star is given for every category in which the suggested portfolio outperforms your existing portfolio.
Next day Value At Risk (VaR) — Value of your portfolio that is likely to decrease over the next trading day
Expected Return — Weighted-average daily return of all assets in your portfolio
Total Risk — Standard deviation (volatility) of the portfolio returns
Sharpe Ratio — Excess return per unit of total risk in your portfolio