Optimal Portfolio Modeling : Models to Maximize Returns and Control Risk in Excel and R

by Philip McDonnell

• ISBN13: 9780470260852
• ISBN10: 0470260858
• Format: eBook
• Copyright: 2008-05-01
• Publisher: Wiley

Summary

Optimal Portfolio Modeling is an easily accessible introduction to portfolio modeling for those who prefer an intuitive approach to this discipline. While early chapters provide engaging insights on the statistical properties of markets, this book quickly moves on to illustrate invaluable trading and risk control models based on popular programs such as Excel and the statistical modeling language R. This reliable resource presents modeling formulas that will allow you to effectively maximize the performance, minimize the drawdown, and manage the risk of your portfolio.

Table of Contents

Foreword

Preface

Acknowledgments

About the Author

Modeling Market Microstructure Randomness in Markets

The Random Walk Model

What You Cannot Predict Is Random To You

Market Microstructure

Efficient Market Hypothesis

Arbitrage Pricing Theory

The Distribution of Price Changes

The Normal Distribution

The Empirical Distribution

The Lognormal as an Approximation

Investment Objectives

Statistician's Fair Game

A Fair Game Is A Loser!

Criteria for a Favorable Game

Gambler's Ruin

Optimal Return Models

Markets Are Rational, Psychologists Are Not

The St. Petersburg Paradox

Compounded Return is the Real Objective

Defining Risk

Minimum Risk Models

Correlation of Assets

Summary of Correlation Relationships

Beta and Alpha

The Efficient Frontier and the Market Portfolio

The Sharpe Ratio

Limitations of Modern Portfolio Theory

Modeling Risk Management and Stop Loss Myths

Stop Loss Orders

Stops: Effect on the Mean Return

Stops: Effect on the Probability of Gain

Stops: Probability of being stopped out

Stops: Effect on Variance and Standard Deviation

Effect on Skew

Effect on the Kurtosis

Stop Loss: Summary

Modeling Stops

Identifying When to Use Stops and When Not To

Stop Profits

Puts and Calls

Maximal Compounded Return Model

Optimal Compound Return Models

Relative Returns

Average Stock Returns, but Compound Portfolio Returns

Logarithms and the Optimal Exponential Growth Model

Position Sizing as the Only Guaranteed Risk Control

Controlling Risk through Optimal Position Sizing

Maximize Compounded Portfolio Return

Maximal Compounded Return Models

What the Model Is and Is Not

Modeling the Empirical Distribution

Correlations

The Enhanced Maximum Investment Formulas

Expected Drawdowns May be Large

Utility Models - Preferences Toward Risk and Return

Basis for a Utility Model

History of Logarithms

Optimal Compounded Utility Model

The Sharpe Ratio

Optimal Model for the Sharpe Ratio

Optimization with Excel Solver

Money Management Formulas Using the Joint Multi-Asset Distribution

The Continuous Theoretical Distributions

Maximal Log Log Model in the presence of Correlation

Optimal Sharpe Model with Correlation

The Empirical Distribution

Maximal Log Log Model in the Presence of Correlation

Maximizing the Sharpe Ratio in the Presence of Correlation

Proper Backtesting for Portfolio Models

Assuring Good Data

Synchronize Data

Use Net Changes NOT Levels

Only Use Information from the Past

Predictive Studies vs. Non-Predictive Studies

Use Intraday Highs and Lows for Model Accuracy

Adjusted Data May Be Erroneous

Adjusting Your Own Data

Miscellaneous Data Pitfalls

Tabulate and Save the Detailed Results with Dates

Overlapping Dates are Important for Correlations

Calculate Mean, Standard Deviation, Variance and Probability of Win

Robust Methods to Find Statistics

Confidence Limits for Robust Statistics

The Combined Optimal Portfolio Model

Choosing the Theoretical Distribution

The Empirical Distribution

Selecting Sharpe Versus a Log Log Objective Function

Model Simulation

Professional Money Manager versus Private Investor

About the CD-Rom

Contents of the CD-Rom

Installation of the CD-Rom

Using the Programs

Updates to the CD-Rom

Table of Values of the Normal Distribution

Installing R

Introduction to R

Introduction to R Manual

R Language Definition

R Language Definition Manual

Index

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