It is not a simple solution because we have to answer some questions.Ĭan we achieve the desired return with the instrument we are working with?Īre there other instruments that allow us to achieve a higher return with the same risk or less risk with the same return? This would be the simplest portfolio, but not a simple solution. When we only have one strategy managing one instrument, portfolio management is limited to maximizing return while minimizing risk. “ An efficient portfolio is defined as a portfolio with minimal risk for a given return, or, equivalently, as the portfolio with the highest return for a given level of risk.”Īs algorithmic traders, our portfolio is made up of strategies or rules and each of these manages one or more instruments. It is the trader's responsibility to know these and other methods in order to determine which of them best suits his investment style and risk appetite. On the other hand, there is Kelly's method proposed by John Kelly and Ed Thorpe that tries to maximise the expectation of the log utility of wealth, i.e.it focuses on containing the assigned risk. The efficient frontier proposed by Markowitz in which we try to maximize the return with a certain risk, i.e.Two of the best known and diametrically opposed methods are: To have a benchmark with which to compare our optimization we will start from the simple portfolio distributing the same weight for each of its elements.įor the optimization of weights in the capital distribution, there are numerous academic studies, each one trying to optimize different parameters. How do we distribute capital among the different strategies and instruments in order to maximise the return and minimise the risk? With this simple portfolio, we arrive at the basic question: Obviously, the objective of managing a portfolio of strategies is still to maximize return while minimizing risk. Of course, these strategies handle instruments in which we can be long, short or stay waiting. Managing a portfolio or Portfolio Management of multiples strategies do not differ much from how to manage a portfolio of assets, only that in this case, the assets are the strategies we have operational. The Efficient Frontier: Markowitz Portfolio Optimization.Portfolio weights optimized with Kelly criterion.In this blog, we will be covering the following topics: We will analyze Kelly's method and we will see different combinations that will help us maximize the return and we will compare it with the simple portfolio of equally distributed weights.įinally, we propose a comparison with the classical method of efficient frontier portfolio management.Ĭheck out my previous article on Introduction To Portfolio Management which explains all that you need to know about Portfolio Management like techniques, types, derivatives, and much more. 140.0000 -1056.50"""), sep="\s ").reset_index()įor i, date, profit, cumulative in df.itertuples():ĭf.In this post we are going to review what a portfolio is, the elements it contains, in addition to reviewing some performance measures, later we will create a simple portfolio with two strategies and several instruments. There may be better ways, but you can calculate this in pandas using a itertuples(): import pandas as pdĭf = pd.om_csv(StringIO("""Date Profit Cumulative (In the future, you should explicitly define your desired output and don't assume people know what you are asking.) From what I remember, a drawdown is the amount by which your portfolio profit is less than the high.
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