|
|
|
Portfolio Suggestion with Efficient Frontier
|
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.
|
1. Segregation based on closeness to original portfolio
Suggestion One
Portfolio Optimization
Optimizing your existing positions to adjust to an asset allocation
that is optimal for your specified risk appetite. No additional assets are added.
This is a classical mean-variance optimization without rebalancing
|
Suggestion Two
Passive Rebalancing
Removing assets with negative expected returns and replacing
them with assets drawn from the market.
Then rebalancing it to get an asset allocation
that is optimal for your specified risk level.
|
Suggestion Three
Active Rebalancing
Removing 40 to 60% of assets with poor performance and adding
better performing assets from the market.
Then rebalancing it to get an asset allocation that is optimal for your specified risk level
|
Suggestion Four
Total Rebalancing
Replacing all of your existing positions
with better performing assets.
Then rebalancing your new portfolio to get asset allocation that is
optimal for your specified risk level
|
 The greener the suggestion the closer it is to your original portfolio
in terms of asset composition and class.
2. Segregation based on performance gain over original portfolio
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
Perfect Optimization
Suggested portfolio outperforms the original portfolio in all four categoreis
|
Good Optimization
Suggested portfolio outperforms the original portfolio in three out of four categoreis
|
Weak Optimization
Suggested portfolio outperforms the original portfolio in two out of four categoreis
|
Poor Optimization
Suggested portfolio outperforms the original portfolio in one out of four categoreis
|
No Optimization
Suggested portfolio does not outperform the original portfolio in any of four categoreis
|
Portfolio Optimization
This toolset is written in the context of
Modern Portfolio Theory (MPT). MPT suggests that rational investors will use
diversification to optimize their portfolios.
The goal of this toolset is to suggest a unique, optimal portfolio that can be constructed
with respect to an investor's risk preferences and constraints.
Modern Portfolio Theory (MPT)
is a sound method for many investors
in establishing a disciplined approach to investing. It simply assumes that most investors dislike risk,
and will make decisions based on maximizing returns for a level of risk that is acceptable to them.
This toolset is built on this very simple assumption, giving mainstream investors a set of conventional techniques
to reduce exposure to individual asset risk by holding a diversified portfolio of assets.
How to Use This Toolset
Using the Wealth Management Pitchlet Toolset is easy. As a rational investor, your objective is to build a portfolio where the excess return per unit of total risk is maximized. You can reduce portfolio risk simply by holding securities that are not perfectly correlated. In other words, you can reduce exposure to individual asset risk by holding a diversified portfolio. Diversification will allow for the same portfolio return with reduced risk. Whether you are a risk taker or an extremely conservative investor, this toolset will allow you to construct a portfolio that is optimized against your specific risk preferences and objectives.
Building an Optimal Portfolio
The methodology for optimizing your portfolio is extremely easy. First, import
or select assets to be included in your portfolio using
Stocks,
Funds
or ETFs browsers.
Second, use Portfolio Analyzer to evaluate your holdings individually, and to compare your entire portfolio performance against selected benchmark. Third, use Portfolio Optimizer and Efficient Frontier Pitchlets to optimize your holdings against your risk preferences and constraints. These three steps are repeated until perfect optimization is achieved. If you are lucky, you can obtain perfect optimization on the very first pitch; or it may take you few iterations until desired optimization is achieved. Achieving Perfect Optimization
We provide a very simple four-star optimization methodology. Your goal is to outperform your existing portfolio in all four categories.
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 return
Sharpe Ratio — Excess return per unit of total risk in your portfolio
Two simple ways to optimize your portfolio
 The easiest way to determine if your portfolio is optimal is to pitch
Portfolio Optimizer
several times replacing your current portfolio with resulted optimal portfolio after each iteration.
You should stop this process when all relative scores of your portfolio are identical
(or almost identical) to relative scores of the optimal portfolio.
 Another way to determine if your portfolio is optimal is to pitch
Efficient Frontier
several times replacing your current portfolio with resulted optimal portfolio after each iteration.
You should stop this process when risk and return characteristics of both portfolios are the same (i.e. current and optimal
portfolios simply overlap each other on the risk/return graph)
Note: Depending on your attitude towards risk, you may settle for allocations that are superior to your existing portfolio but are not perfectly optimal. Although this is totally acceptable, we recommend to get at least three out of five stars before deciding to stop your optimization process.
 |
Portfolio Construction |
Correlation Inspector
|
Correlation Inspector finds correlations between the returns of each asset in the specified portfolio against every other asset it contains. It constructs a conventional correlation table with color-coded cells, identifying the highest and lowest values, as well as values that fall within 1, 2, and 3 standard deviations from 0.
|
 |
Portfolio Optimization |
Performance Analyzer
Performance Analyzer runs balanced, risk-adjusted comparisons between different assets. It uses two commonly used performance indicators — Sharpe and Treynor. The Treynor Measure takes into account systematic risk whereas the Sharpe Ratio uses volatility. Assets with higher performance ratios should be preferred to assets with lower performance.
|
 |
Portfolio Analyzer
 |
Portfolio Analyzer evaluates your portfolio on the basis of expected return and risk, and presents the One-Day Value Risk of your position with respect to the specified historical time period. It is based on the probability distribution of a portfolio's market value given user-specified confidence level.
|
Portfolio Optimizer
Portfolio Optimizer evaluates the One-Day Value At Risk of the optimal portfolio along with total risk, expected return, and several common performance measures. The result is compared to your existing portfolio. The main objective, as a rational investor, is to outperform the existing portfolio in all 5 categories.
|
|
Efficient Frontier
|
This model constructs a basic Markowitz Efficient Frontier that represents variously weighted combinations of the portfolio's assets, yielding the maximum possible expected return at any given level of risk. It identifies the optimal portfolio on the efficient frontier for the desired risk level.
|
 |
Portfolio Rebalancing |
Rebalancing is simply the process of buying and selling portions of your existing portfolio after an investment strategy or tolerance for risk has changed, or if market conditions have changed. By using the Wealth Management Pitchlet Toolset investors can adjust the weight of each asset in the portfolio to satisfy a newly devised asset allocation.
Applied Modern Portfolio Theory (MPT)
|
The dot-com crash in the beginning of this century and current financial crisis
taught many investors an important lesson:
diversification matters.
A combination of rapidly increasing stock prices, individual
speculation in stocks, accounting gimmicks and manipulations, widely available venture capital, relaxes lending standards,
abuse of collaterized mortgage obligations and securities and adoptions of
'Ponzi' and other pyramid schemes by private fund managers created an exuberant environment
in which many investors became exceedingly wealthy.
The bursting of the bubble created a completely opposite effect, as many unprepared and uninsured investors lost their fortunes
as quickly as they acquired them just a few years earlier. Following the beginning of a
rather lengthy recession, many investors are drastically reconsidering their
investment habits as well as asset allocation principles and are turning to a more educated
approach to diversification and market risk management.
|
Macroaxis Corporation delivers a simple methodology to communicate complex wealth
management analytics. Our implementation of Modern Portfolio Theory (MPT)
is based on simplicity, speed, accessibility, and enhanced user experience, making
technology that was once accessible only to professional money managers available
to the entire investing community.
|
-0.29%
