Others are W.I.P (work in progress) therefore I don't want to mention them in this post.
Today I want to show how to combine my models to decide the % of portfolio for each one.
I'm going to use Markowitz optimization thanks to an excel written by Ravi Shukla.
http://myweb.whitman.syr.edu/rkshukla/Essentials/
Below I report the expected returns, standard deviation and correlations of 3 models
Constraints: no model can weigh more than 60%
Then I ran an optimization looking basically for 3 theoretical portfolio:
- Constrained min. standard deviation
- Maximize expected return in a range 5-10%
- Max CAL slope assuming cash rate 0.3%.
You obtain 3 possible portfolios with different weights
For myself I prefer using the first on the left that gives
60% Model 1 - 16% Model 2 and 24% Model 3
I also keep some cash for discretionary strategies because I must optimize the fiscal side. In Italy Etfs are penalized because I can't compensate gains with losses, therefore I need other instruments to recover losses.
Finally someone could also use the portfolio that maximizes CAL (Capital Allocation Line) to move along the black line and rise expected returns or lower standard deviation reaching points not available with the efficient frontier. This is built with a +0.3% cash rate at 1 year.
