Gyroscopic Investing

Kbg wrote:http://papers.ssrn.com/sol3/papers.cfm? ... id=2770897

Go to Tables 3 and 4 to get the bottom line. And here is the verbal generic findings

Our results suggest that the optimal risky portfolio is approximately 76% bonds, 8% gold, 7% emerging markets, 4% U.S. stock, 4% real estate, and 1% platinum. However, that is not a utility maximizing portfolio for any investor. Depending on an investor’s risk aversion level, the utility maximizing range of asset allocation is from 25-57% emerging markets, 0-38% bonds, 12-33% real estate, and 10-24% gold.

We also examine the robustness of these allocations to changing assumptions about the risk-free rate and find that the utility maximizing portfolio choice is unaltered.

What I find interesting is the prominence of gold in both the long only and the long\short optimal portfolios.

Despite its theoretical and practical importance, scientific guidance on making the optimal asset allocation decision is lacking.

Kbg wrote:If you are looking at individual stock screens I suggest checking out The Motley Fool Mechanical Investing board. Much corporate knowledge there but the learning curve is steep.

MachineGhost wrote:I stumbled across this invaluable thread:

http://discuss.morningstar.com/NewSocia ... 70831.aspx

The risk/reward of the guy's portfolios is unbelievable.

FF9000 wrote:Fascinating, and he is strongly influenced by HB. Now I need to create a spreadsheet to backtest myself...

Reub wrote:Some don't believe your numbers either!

InsuranceGuy wrote:I've been looking at starting a thread as I'm doing something similar but still tweaking it. Basically I've been looking at tuning a value threshold for stocks in a momentum framework to increase returns and then using MVO to reduce the drawdowns. I'm working out the formulas and parameters but the inital results look promising, still trying to apply a consistency measure to reduce trading.

We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2012. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 14 years. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest three possible explanations for the declining momentum profits that involve uncovering of the anomaly by investors, decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.

http://papers.ssrn.com/sol3/papers.cfm? ... id=2791138

InsuranceGuy wrote:So I still have a lot to look at because my laptop is slowing me down relative to my still unavailable desktop. That said, PAA initially looked like a home run, but then going back there is considerable model risk in developing risk on/off parameters as more market information becomes available. FAA/EAA/other variants seem to work well if implemented properly. I've tried playing with various EAA iterations but minimum variance optimization while more computationally intensive seems to work better than using volatilities/correlations separately.

bedraggled wrote:MG is fast approaching 10,000 posts.

Maybe a cheer or a gathering at the Research Resort to celebrate.

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