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Applied Modern Portfolio Theory (MPT)The dot-com crash in the beginning of this century taught many investors a basic lesson: diversification matters. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many investors became unexpectedly wealthy. The bursting of the dot-com bubble created the completely opposite effect, as many unprepared and uninsured investors lost their fortunes as quickly as they acquired them just a few years before. Following the beginning of a relatively mild but rather lengthy recession, many modern investors had to drastically reconsider their asset allocation principles and turn to a more educated approach to investing.Macroaxis Corporation delivers a simple three-step method 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. 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.
Wealth Management Toolset Portfolio Assembly
Portfolio Optimization
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 solely 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 ToolsetUsing 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 PortfolioThe 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 OptimizationWe 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.
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.
Market Browser
Etf Browser
Fund Browser
Correlation Inspector
Industry Browser
Performance Analyzer
Portfolio Analyzer
Portfolio Optimizer
Efficient Frontier
ReferencesModern Portfolio Theory From Wikipedia, the free encyclopedia Learn About Modern Portfolio Theory (MPT)Markowitz, Harry M. (1952). Portfolio Selection, Journal of Finance, 7 (1) Sharpe, William F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19(3) Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, The Review of Economics and Statistics, 47 (1), 13-39 Burmeister E and Wall KD., The arbitrage pricing theory and macroeconomic factor measures, The Financial Review, 21:1-20, 1986 Chen, N.F, and Ingersoll, E., Exact pricing in linear factor models with finitely many assets: A note, Journal of Finance June 1983 Fama, E. and French, K. (1992). The Cross-Section of Expected Stock Returns, Journal of Finance, June 1992, 427-466 Black, F., Jensen, M., and Scholes, M. The Capital Asset Pricing Model: Some Empirical Tests, in M. Jensen ed., Studies in the Theory of Capital Markets. (1972) French, C. W. (2003). "The Treynor Capital Asset Pricing Model", Journal of Investment Management, 1 (2), 60-72 Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47 (1), 13-37 Markowitz, Harry M. (1999). The early history of portfolio theory: 1600-1960, Financial Analysts Journal, 55 (4) Tobin, James (1958). Liquidity preference as behavior towards risk, The Review of Economic Studies, 25 Treynor, J. L. (1961). "Market Value, Time, and Risk." Unpublished manuscript. Treynor, J. L. (1962). "Toward a Theory of Market Value of Risky Assets." Unpublished manuscript. Other ResourcesRobust Portfolio Optimization and Management by Frank J. Fabozzi, Petter N. Kolm, Dessislava Pachamanova, Sergio M. FocardiPortfolio Optimization and Performance Analysis by Jean-Luc Prigent Option Pricing and Portfolio Optimization by Ralf Korn, Elke Korn Portfolio optimizations in incomplete financial markets by Walter Schachermayer Bond Portfolio Optimization by Michael Puhle An MCDM approach to portfolio optimization by M. Ehrgott, K. Klamroth, C. Schwehm |
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Another way to determine if your portfolio is optimal is to pitch
