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Know-How - Portfolio Management

Making a decision on adding some asset to portfolio investor needs to analyze its investment appeal and calculate share of capital he will invest to that asset.

Portfolio management is essential part of PortfolioRunner and it is meant for optimal capital allocation between assets. The criterion of capital allocation is maximization of return from one side and minimization of risk from the other.

At the very beginning investor has to choose one of suggested levels of risk that he prefers most. The levels of risk we suggest are low risk, middle risk and high risk.

Risk of share is calculated as standard deviation of return. Only low risk shares are accepted to low risk portfolio, middle risk shares – to middle risk portfolio and high risk shares – to high risk portfolio.

Minimization of portfolio risk is achieved with the help of the following rules.

1.      Not more than 5% of capital can be invested into one company. This rule helps to reduce the losses in case a single share price will fall down.

2.      Not more than 10% of share average daily volume of one company can be bought. This rule helps to reduce liquidity risk that is assurance in the ability to buy or sell share at the price close to current price.

3.      In case of free capital deficit to buy recommended stocks our portfolio management algorithm choose stocks that minimize portfolios risk. This rule helps to buy weakly correlated stocks and reduce risk of capital losses at abnormal sector behavior.

Maximization of portfolios return is achieved by minimization of free capital if and only if it is not conflict with three rules above. Maximizing portfolios return the information about historical return of the asset is not used because it is not robust.

When there are buy and sell recommendation, firstly we sell needed stocks and only then we buy recommended stocks.

The portfolio modeling rules are very close to the reality. Buy and sell decisions on particular number of shares are made at the end of the trading day at close price. Portfolios equity curves calculation take place at real open prices of next trading day. Using market order our model portfolios is very close to the reality because, according to the second rule of minimization of portfolio risk, the real trades have very low effect on stock price.

Portfolio modeling algorithm takes into account broker commissions that is $10 for a transaction. For commissions minimization it is allowed to invest minimum of $1000 into one stock.

Portfolios performance page provides information about the behavior of portfolios equity curves.