The Diversification Ratio: Measuring Portfolio Diversification
Continuing the series of blog posts on diversification indicators, I describe in this post a correlation-based measure of portfolio diversification called th...
Posts by Year
2023
2022
The Informativeness: Measuring the Homogeneity of a Universe of Assets
In this post, I will describe a measure of the homogeneity of a universe of assets, called the informativeness, introduced by Brockmeier et al.1 in their pap...
Trading Strategy Monitoring: Modeling the PnL as a Geometric Brownian Motion
Systematic trading strategies have the unfortunate habit of exhibiting worse performances in real-life than in backtests, partially due to backtest overfitti...
Correlation Matrices Denoising: Results from Random Matrix Theory
The estimation of empirical correlation matrices in finance is known to be affected by noise, in the form of measurement error, due in part to the short leng...
The Probabilistic Sharpe Ratio: Hypothesis Testing and Minimum Track Record Length for the Difference of Sharpe Ratios
In the first post of this series about the Sharpe ratio considered as a statistical estimator, I introduced a probabilistic framework to answer the question
The Probabilistic Sharpe Ratio: Bias-Adjustment, Confidence Intervals, Hypothesis Testing and Minimum Track Record Length
The Sharpe ratio1 is one of the most commonly used measure of financial portfolio performance, but because it is deeply rooted in mean-variance theory, its ...
Bootstrap Simulation with Portfolio Optimizer: Usage for Financial Planning
In statistics, a bootstrap method, also called bootstrapping, is a compute-intensive procedure that allows to estimate the distribution of a statistic throu...
Computation of Theory-Implied Correlation Matrices: Overview and Example
In this short post, I will provide an overview of the TIC algorithm1 introduced by Marcos Lopez de Prado in his paper Estimation of Theory-Implied Correlatio...
The Effective Number of Bets: Measuring Portfolio Diversification
Many different measures of portfolio diversification have been developed in the financial literature, from asset weights-based diversification measures like ...
Correlation Matrix Stress Testing: Shrinkage Toward the Lower and Upper Bounds of a Correlation Matrix
I previously described on this blog an intuitive way of performing stress tests on a correlation matrix, which consists in shrinking a baseline correlation ...
Adjusted Prices Without Look-Ahead Bias
When backtesting an investment strategy, that is, when simulating an investment strategy using historical prices to test how this strategy would have behaved...
Mean-Variance Optimization in Practice: Subset Resampling-based Efficient Portfolios
In a previous post, I introduced near efficient portfolios, which are portfolios equivalent to mean-variance efficient portfolios in terms of risk-return bu...
Selecting a Stock Market Data (Web) API: Not So Simple
I am sometimes asked if I recommend any stock market data (web) API for a personal use, especially because I mention Alpha Vantage in a couple of previous po...
The Absorption Ratio: Measuring Financial Risk, Part 2
In the previous post, I reviewed the turbulence index, an indicator of financial market stress periods based on the Mahalanobis distance, introduced by Chow...
The Turbulence Index: Measuring Financial Risk
One of the challenges in portfolio management is the timely detection of financial market stress periods, typically characterized by an increase in volatilit...
Mean-Variance Optimization in Practice: Well Diversified (Near) Efficient Portfolios
One well-known stylized fact of the Markowitz’s mean-variance framework is that, irrespective of the quality of the estimates of asset returns and (co)varian...
Ulcer Performance Index Portfolio Optimization
The Ulcer Performance Index1 (UPI) is a portfolio reward-risk measure introduced by G. Martin2 similar in spirit to the Sharpe Ratio, but using the Ulcer In...
The Matrix Effective Rank: Measuring the Dimensionality of a Universe of Assets
Quantifying how diversified is a universe of assets is an open problem in quantitative finance, partly because there is no definite formula for diversificati...
2021
Beyond Hierarchical Risk Parity: Hierarchical Clustering-Based Risk Parity
In a previous post, I introduced the Hierarchical Risk Parity portfolio optimization algorithm1. See Lopez de Prado, M. (2016). Building dive...
Hierarchical Risk Parity: Introducing Graph Theory and Machine Learning in Portfolio Optimizer
In this short post, I will introduce the Hierarchical Risk Parity portfolio optimization algorithm, initially described by Marcos Lopez de Prado1, and recen...
Correlation Matrix Stress Testing: Shrinkage Toward an Equicorrelation Matrix
Financial research has consistently shown that correlations between assets tend to increase during crises and tend to decrease during recoveries1. ...
Residualization of Risk Factors: Examples and Pitfalls
The most common approach to measuring portfolio (risk) factor exposures is linear regression analysis, which describes the relationship between a dependent ...
Replicating the J.P. Morgan Efficiente Index
The J.P. Morgan Efficiente 5 Index is a tactical asset allocation strategy designed by J.P. Morgan based on a broad universe of 13 ETFs.
Crypto-assets portfolio optimization and trade order creation with Google Sheets
Crypto-assets (Bitcoin, Ethereum…) have recently been attracting the attention of more and more investors, with for example JPMorgan Chase & Co. suggesti...
When a Correlation Matrix is not a Correlation Matrix: the Nearest Correlation Matrix Problem
Estimating how individual assets are moving together is an important part of many financial applications1 and the most commonly used measure for this is the...
The Portfolio Optimization Machine
In 2018, guys at ReSolve Asset Management published the paper Portfolio Optimization: A General Framework for Portfolio Choice in which they describe
2020
Random Portfolios as Benchmarks for Tactical Asset Allocation Strategies
If you are familiar with tactical asset allocation (TAA) strategies, like the Global Equities Momentum (GEM) TAA strategy of Gary Antonacci, you know how har...
Integration in Excel
In this post, I will show you how to integrate the Portfolio Optimizer Web API in Excel.
Implementing an Investable Portfolio From an Optimal Portfolio
As an investor, have you ever wondered how to convert an optimal portfolio1, possibly made of real-valued weights with dozens of decimals (e.g., 12.3456789%)...
Integration in a Web Page
In this post, I will show how to integrate the Portfolio Optimizer Web API in a web page.
Integration in Google Sheets
In this post, I will show you how to integrate the Portfolio Optimizer Web API in Google Sheets.