Portfolio MCS
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Using MCS Software

Optimizing Portfolio Weights

Optimizing the weights of futures commodities in a portfolio can reduce risk and increase return. The biggest risk is from serially correlation between commodities. For instance, we would expect there to be some correlation between the Dollar Index and other currencies. Systems are likely to be short the Dollar Index at times the other currencies are long. This can cause the risk to increase dramatically because they are both likely to be in drawdowns simultaneously. By optimizing weights, we can detect these problems and alter the portfolio accordingly.

You can choose to optimize in two different ways. The first is optimizing Return/Risk using the Markowitz solution where risk is the standard deviation of residuals of the equity curve around the linear regression line. This attempts to modify the weights so that the equity curve is as straight as possible, however drawdown is likely to increase. The second method is preferred and was suggested by Perry Kaufman, and defines risk as the standard deviation of drawdowns. As you can see below, the portfolio has not been optimized. Weights are all set to 1 except bonds which are set to 2.



(These features only available with Professional version)

We have chosen to optimize based on Std Dev of DD. After running the optimization routine several times we find a set of weightings that is entirely different. Corn(C), Cocoa(CC), Lean Hogs(LH) and Orange Juice(OJ) are more heavily weighted and other commodities are less heavily weighted. The Return/St Dev of DD ratio has increased to 6.66% from 4.15%. We can keep these settings by clicking on Accept.



(These features only available with Professional version)

 

Software pages continued:
 1 Portfolio Selection and File Selection  4 MCS Results: Drawdown and Net Profit
 2  Set Portfolio Weights and Portfolio Statistics  6 Revised Portfolio Weightings
 3 Portfolio History Chart and Output Files to ASCII  7 Portfolio Templates

 

 8 MCS Product Comparison

 


What Is Monte Carlo Simulation?  |  Why Get Portfolio MCS?  |  Using MCS Software  |  MCS Features
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