Quant Mashup - Portfolio Optimizer

Selecting a Stock Market Data (Web) API: Not So Simple [Portfolio Optimizer]

I am sometimes asked if I recommend any stock market data (web) API for a personal use, especially because I mention Alpha Vantage in a couple of previous posts1. I will describe in this post part of the thought process and of the due diligence which led me to select this financial market data

*- 1 week ago, 11 May 2022, 10:11am -*

The Absorption Ratio: Measuring Financial Risk, Part 2 [Portfolio Optimizer]

In the previous post, I reviewed the turbulence index, an indicator of financial market stress periods based on the Mahalanobis distance, introduced by Chow and al.1 and Kritzman and Li2. In this post, I will review the absorption ratio, a measure of financial market fragility based on principal

*- 2 weeks ago, 29 Apr 2022, 04:17am -*

The Turbulence Index: Measuring Financial Risk [Portfolio Optimizer]

One of the challenges in portfolio management is the timely detection of financial market stress periods, typically characterized by an increase in volatility and a breakdown in asset correlations1. Chow and al.2 propose to detect such periods through the usage of the caste distance, a measure

*- 1 month ago, 18 Apr 2022, 10:31am -*

Mean-Variance Optimization: Well Diversified (Near) Efficient Portfolios [Portfolio Optimizer]

One well-known stylized fact of the Markowitz’s mean-variance framework is that, irrespective of the quality of the estimates of asset returns and (co)variances, efficient portfolios are concentrated in a very few assets1. From a practitioner’s perspective, this has always been a problem12. In

*- 1 month ago, 1 Apr 2022, 12:38pm -*

Ulcer Performance Index Portfolio Optimization [Portfolio Optimizer]

The Ulcer Performance Index1 (UPI) is a portfolio reward-risk measure introduced by G. Martin2 similar in spirit to the Sharpe Ratio, but using the Ulcer Index (UI) as a risk measure instead of the standard deviation. In this blog post, I will present the mathematics behind the Ulcer Performance

*- 3 months ago, 4 Feb 2022, 10:12am -*

The matrix effective rank: measuring the dimensionality of a universe of assets [Portfolio Optimizer]

Quantifying how diversified is a universe of assets is an open problem in quantitative finance, partly because there is no definite formula for diversification1. Let’s make the (reasonable) assumption that the way assets are moving together within a universe is important for its diversification.

*- 4 months ago, 7 Jan 2022, 10:16am -*

Beyond Hierarchical Risk Parity: Hierarchical Clustering-Based Risk Parity [Portfolio Optimizer]

In a previous post, I introduced the Hierarchical Risk Parity portfolio optimization algorithm1. In this post, I will present one of its variations, called Hierarchical Clustering-Based Risk Parity, first described in Papenbrock2 and then generalized in Raffinot34 and in Lohre et al.5, from which

*- 7 months ago, 19 Oct 2021, 11:34am -*

Hierarchical Risk Parity: Introducing Graph Theory and Machine Learning in Portfolio Optimizer [Portfolio Optimizer]

In this short post, I will introduce the Hierarchical Risk Parity portfolio optimization algorithm, initially described by Marcos Lopez de Prado1, and recently implemented in Portfolio Optimizer. I will not go into the details of this algorithm, though, but simply describe some of its general ideas

*- 8 months ago, 7 Sep 2021, 11:35am -*

Correlation Matrix Stress Testing: Shrinkage Toward an Equicorrelation Matrix [Portfolio Optimizer]

Financial research has consistently shown that correlations between assets tend to increase during crises and tend to decrease during recoveries1. The recent COVID-19 market crash was no exception, as illustrated on Alvarez Quant Trading blog post Correlations go to One for both the individual

*- 8 months ago, 23 Aug 2021, 10:35pm -*

Residualization of Risk Factors: Examples and Pitfalls [Portfolio Optimizer]

The most common approach to measuring portfolio (risk) factor exposures is linear regression analysis, which describes the relationship between a dependent variable - portfolio returns - and explanatory variables - factors - as linear. One of the outputs of this analysis are the partial regression

*- 9 months ago, 27 Jul 2021, 10:58am -*

Replicating the J.P. Morgan Efficiente Index [Portfolio Optimizer]

The J.P. Morgan Efficiente 5 Index is a tactical asset allocation strategy designed by J.P. Morgan based on a broad universe of 13 ETFs. This post will illustrate how to replicate this strategy with Google Sheets. Notes: A fully functional spreadsheet corresponding to this post is available here.

*- 10 months ago, 23 Jun 2021, 11:11am -*

When a correlation matrix is not a correlation matrix and what can be done about it [Portfolio Optimizer]

Estimating how individual assets are moving together is an important part of many financial applications1 and the most commonly used measure for this is the Pearson correlation. Unfortunately, for a variety of reasons, what sometimes appears to be a correlation matrix is actually not a valid

*- 1 year ago, 2 Feb 2021, 08:10pm -*