Quant Mashup - OSM
Sequential satisficing [OSM]
In our last post, we ran simulations on our 1,000 randomly generated return scenarios to compare the average and risk-adjusted return for satisfactory, naive, and mean-variance optimized (MVO) maximum return and maximum Sharpe ratio portfolios.1 We found that you can shoot for high returns or high
- 4 years ago, 18 Sep 2020, 09:58pm -
Satisficing and optimizing [OSM]
In our last post, we explored mean-variance optimization (MVO) and finally reached the efficient frontier. In the process, we found that different return estimates yielded different frontiers both retrospectively and prospectively. We also introduced the concept of satsificing, originally developed
- 4 years ago, 26 Aug 2020, 09:38pm -
I like to MVO it! [OSM]
In our last post, we ran through a bunch of weighting scenarios using our returns simulation. This resulted in three million portfolios comprised in part, or total, of four assets: stocks, bonds, gold, and real estate. These simulations relaxed the allocation constraints to allow us to exclude
- 4 years ago, 31 Jul 2020, 11:59pm -
Weighting on a friend [OSM]
Our last few posts on portfolio construction have simulated various weighting schemes to create a range of possible portfolios. We’ve then chosen portfolios whose average weights yield the type of risk and return we’d like to achieve. However, we’ve noted there is more to portfolio
- 4 years ago, 24 Jul 2020, 11:48pm -
Testing expectations [OSM]
In our last post, we analyzed the performance of our portfolio, built using the historical average method to set return expectations. We calculated return and risk contributions and examined changes in allocation weights due to asset performance. We briefly considered whether such changes warranted
- 4 years ago, 10 Jul 2020, 12:41pm -
Performance anxiety [OSM]
In our last post, we took a quick look at building a portfolio based on the historical averages method for setting return expectations. Beginning in 1987, we used the first five years of monthly return data to simulate a thousand possible portfolio weights, found the average weights that met our
- 4 years ago, 26 Jun 2020, 04:57am -
Portfolio simulations [OSM]
In our last post, we compared the three most common methods used to set return expectations prior to building a portfolio. Of the three—historical averages, discounted cash flow models, and risk premia models—no single method dominated the others on average annual returns over one, three, and
- 4 years ago, 13 Jun 2020, 12:20pm -
Mad methods [OSM]
Over the past few weeks, we’ve examined the three major methods used to set return expectations as part of the portfolio allocation process. Those methods were historical averages, discounted cash flow models, and risk premia models. Today, we’ll bring all these models together to compare and
- 4 years ago, 29 May 2020, 09:03pm -
Implied risk premia [OSM]
In our last post, we applied machine learning to the Capital Aset Pricing Model (CAPM) to try to predict future returns for the S&P 500. This analysis was part of our overall project to analyze the various methods to set return expectations when seeking to build a satisfactory portfolio. Others
- 4 years ago, 19 May 2020, 12:11pm -
Machined risk premia [OSM]
Over the last few posts, we’ve discussed methods to set return expectations to construct a satisfactory portfolio. These methods are historical averages, discounted cash flow models, and risk premia. our last post, focused on the third method: risk premia. Using the Capital Asset Pricing Model
- 4 years ago, 8 May 2020, 09:34pm -
Risk premia [OSM]
Our last post discussed using the discounted cash flow model (DCF) as a method to set return expectations that one would ultimately employ in building a satisfactory portfolio. We noted that if one were able to have a reasonably good estimate of the cash flow growth rate of an asset, then it would
- 4 years ago, 25 Apr 2020, 12:04pm -
Discounted expectations [OSM]
After our little detour into GARCHery, we’re back to discuss capital market expectations. In Mean expectations, we examined using the historical average return to set return expectations when constructing a portfolio. We noted hurdles to this approach due to factors like non-normal distributions,
- 4 years ago, 15 Apr 2020, 10:13pm -
GARCHery [OSM]
In our last post, we discussed using the historical average return as one method for setting capital market expectations prior to constructing a satisfactory portfolio. We glossed over setting expectations for future volatility, mainly because it is such a thorny issue. However, we read an excellent
- 4 years ago, 5 Apr 2020, 05:22am -
Mean expectations [OSM]
We’re taking a break from our extended analysis of rebalancing to get back to the other salient parts of portfolio construction. We haven’t given up on the deep dive into the merits or drawbacks of rebalancing, but we feel we need to move the discussion along to keep the momentum. This should
- 4 years ago, 29 Mar 2020, 12:27pm -
Rebalancing history [OSM]
Our last post on rebalancing struck an equivocal note. We ran a thousand simulations using historical averages across different rebalancing regimes to test whether rebalancing produced better absolute or risk-adjusted returns. The results suggested it did not. But we noted many problems with the
- 4 years ago, 21 Mar 2020, 09:16pm -
Rebalancing ruminations [OSM]
Back in the rebalancing saddle! In our last post on rebalancing, we analyzed whether rebalancing over different periods would have any effect on mean or risk-adjusted returns for our three (equal, naive, and risky) portfolios. We found little evidence that returns were much different whether we
- 4 years ago, 14 Mar 2020, 01:29pm -
Drawdowns by the data [OSM]
We’re taking a break from our series on portfolio construction for two reasons: life and the recent market sell-off. Life got in the way of focusing on the next couple of posts on rebalancing. And given the market sell-off we were too busy gamma hedging our convexity exposure, looking for cheap
- 4 years ago, 3 Mar 2020, 10:14am -
Rebalancing! Really? [OSM]
In our last post, we introduced benchmarking as a way to analyze our hero’s investment results apart from comparing it to alternate weightings or Sharpe ratios. In this case, the benchmark was meant to capture the returns available to a global aggregate of investable risk assets. If you could own
- 4 years ago, 23 Feb 2020, 10:04am -
Benchmarking the portfolio [OSM]
In our last post, we looked at one measure of risk-adjusted returns, the Sharpe ratio, to help our hero decide whether he wanted to alter his portfolio allocations. Then, as opposed to finding the maximum return for our hero’s initial level of risk, we broadened the risk parameters and searched
- 5 years ago, 14 Feb 2020, 08:26pm -
SHARPEn your portfolio [OSM]
In our last post, we started building the intuition around constructing a reasonable portfolio to achieve an acceptable return. The hero of our story had built up a small nest egg and then decided to invest it equally across the three major asset classes: stocks, bonds, and real assets. For that we
- 5 years ago, 8 Feb 2020, 08:54pm -
Portfolio starter kit [OSM]
Say you’ve built a little nest egg thanks to some discipline and frugality. And now you realize that you should probably invest that money so that you’ve got something to live off of in retirement. Or perhaps you simply want to earn a better return than stashing your cash underneath your bed, I
- 5 years ago, 26 Jan 2020, 11:16am -
Skew who? [OSM]
In our last post on the SKEW index we looked at how good the index was in pricing two standard deviation (2SD) down moves. The answer: not very. But, we conjectured that this poor performance may be due to the fact that it is more accurate at pricing larger moves, which occur with greater frequency
- 5 years ago, 21 Jan 2020, 10:27pm -