Transcript Portfolio Allocation Model - University of New Hampshire

Portfolio Allocation Model
• How to invest in different asset classes?
• Different people have different
objectives/goals.
• Returns from investments are inherently
random. How can we take this uncertainty
into account and still make a reasonable
decision?
Simple Spreadsheet Model
Asset Return Uncertainty (annualized)
• Money Market
– Uniform(minimum 2%, maximum 4%)
• Income
– Normal(mean 5%, stdev 5%)
• Growth & Income
– Normal(mean 7%, stdev 12%)
• Aggressive Growth
– Normal(mean 11%, stdev 18%)
Crystal Ball
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Define Assumption Cells for the annual returns
Define Forecast Cell
Set Simulation Settings (Number trials = 1000)
Run Simulation
View & Analyze Results
Run other two scenarios, complete summary table
Compare alternatives
(If no disk) Upload model to Blackboard Drop Box
(toolsdigital drop box).
Results
• Summary Statistics
– Mean, standard deviation, minimum, maximum, standard error
• Frequency Distribution
– Graphical, table of percentiles
• Interactive use of frequency chart
– What is the probability that the dollar return will be worse than
$X?
– What are the quartiles of the return distribution? What do they
mean?
– If I invest this way, at least how much should I be prepared to lose
about 5% of the time?
Goals/Objectives
• Performance is a function of asset returns as well
as asset allocation.
• We cannot control returns, but we can control the
allocation.
• What is the “best” allocation?
– Depends on the performance measure!
Constrained Optimization
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Objective (maximizing or minimizing)
Constraints
Decision Variables
Basic Question: What are the values of the decision
variables which 1) satisfy the constraints, and 2) maximize
or minimize the objective?
• We will be using Solver soon in the course; however,
Crystal Ball has a tool called OptQuest built in.
• OptQuest is good for models which incorporate
uncertainty, but is much slower than Solver for
deterministic models.
OptQuest
• Build simulation model: define assumptions,
forecast cells, and decision cells
• CBTools…OptQuest
• Wizard takes you through the process of
specifying the optimization model.
• Defining the objective: What is it you want to
maximize or minimize?