Jay's Asset Allocation Blog

Blog about my off-hours work on the problem of Asset Allocation including but not limited to Portfolio Optimization algorithms, algorithms and approaches for improved estimation of Asset Allocation inputs and other potentially related items.

Tuesday, February 17, 2009

More Consistent Formulas

Another update to the paper is out, this time I really went through and tried to clean up all the formulas to make them more consistent. This is a general problem in the literature, where different authors use the same symbol for different things sometimes and other times they use different symbols for the same thing.

There are probably still a few holdouts in the paper, but the general rule is I use E(r) for the scalar expected return on a portfolio, and π as the vector of returns from something. I've tried to keep σ and ω straight as well.

Also updated the cookbook to match the paper. This should address the most obvious questions I have been receiving lately regarding my inconsistent formulas.

As always, comments, questions and suggestions are welcome either via the blog comments or via email.

Saturday, February 14, 2009

More updates and downside risk measures

Another update the the paper is coming out. Michele Costola caught me playing a little fast and loose with π and E(r) in the paper. Somebody else had already noticed this in the cookbook webpage, but now I'm also fixing up the paper. Probably most people won't notice much, but the symbols will now be more consistent throughout the paper.

I read an interesting paper, "The Black-Litterman Model for Active Portfolio Management" by Da Silva, Lee and Pornrojnangkool. The thrust of their argument is that it isn't always right to consider the prior portfolio as being the mean-variance efficient portfolio from CAPM. If one is using Black-Litterman for active management then one should be considering information ratio. I'd like to add this paper to the literature survey paper in some upcoming round.

Wednesday, February 4, 2009

MATLAB Black-Litterman

Finally have access to MATLAB so I was able to port the He and Litterman paper example from SciLab to MATLAB and put it up on the website. Next step will be to move the Idzorek example over as well.

My next project will be to work an example from the literature which generates the views from a multi-factor model. There are a few of these, and Anisa Salomans thesis provides her SciLab source code and I have been able to find all the data freely on the internet.

Monday, February 2, 2009

Updated Paper (reprise)

I updated the paper with a few more tweaks and it's up on the site. I've also posted it to ssrn. The next area I plan on working on here is a multi-factor model to generate the views. Anisa Salomons wrote a thesis on Black-Litterman which I've mentioned before in the blog, and it is her example I'm trying to make a bit more transparent and document so others can easily reproduce it. I've finally tracked down all the data I need (and that I think she used), now I just need to get the scripts in place to do the work. One area I look forward to trying out, is whether using a posterior variance improves the results or does not. She states that she tested this and it was worse, but didn't include any evidence in her thesis and it wasn't on topic.

In project news my move to cleanup the javadocs and get everything squared away for a 1.0 release is coming along. Still have a ways to go, but it's feeling a little closer each day. Hoping to have it done in the next 2 weeks.