Portfolio Design – Empirical Example by Kavout

Mar 15, 2019 | Machine Learning

In this video Alex Lu, CEO of Kavout, offers tips for creating an investment portfolio and how much money one should invest in an idea.

Lu opens by asking if you will invest one dollar? Or will you take out a bank loan? Or will you mortgage your home? The results of a single trade can be dramatic – possibly positively or negatively. A single trade may leave you financially free, or on the brink of suicide. Lu references movies such as The Big Short, or the book One Good Trade, as good plot lines because of the drama involved in these decisions.

So, as an investor you have to ask yourself, can you take this pressure?

The psychological and emotional state of the investor is important, as the computer is only able to offer advice – it is ultimately the decision of the human being to trade.

Lu continues to introduce the concept of Intelligent Portfolio Design, highlighting the different asset allocations that are included in your portfolio, which in addition to stocks may also include bonds, REITs, commodities, and currencies.

Alex continues to introduce the concept of the Optimized Portfolio, which is designed to maximize return while minimizing risk. Lu references the work of Harry Markowitz, the economist who devised the modern portfolio theory (“Portfolio Selection” Journal of Finance, 1952). His theories emphasized the importance of portfolios, risk, and the correlations between securities and diversification. The concern is that the criteria of return and risk are ultimately in conflict. In closing, he references the work of William F. Sharpe, who won the Nobel Prize for Economics with Markowitz in 1990. Sharpe developed the Sharpe Ratio, which was developed to maximize the return for a given risk.

The audience is invited to investigate these innovate practices in more detail.

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