MPT ( Modern Portfolio Theory ) provides an interesting way to analyze and rank the components of a given portfolio. Below is a chart that describes the best sectors and their associated portfolio percentage weights for a particular slice of the resulting Efficient Frontier. The reference for this work is " An Introduction to Investment Theory" by William N. Goetzmann ( Yale School of Management ).

     Another excellent reference is:
  http://www.moneychimp.com/articles/risk/riskintro.htm

    The other side of MPT is presented by Mandelbrot in " The MisBehavior Of Markets"   and I believe it to be required reading.





 

 
 

Email from SuperTicker2 ( 7/11/07 )

The Efficient Frontier strategy as described in the MatLab Finance Toolbox probably provides one of the best portfolio mixes for the buy-and-hold approach.  This is particularly true even in a down market if inverse funds are included in the portfolio.

 
The neat thing about buy-and-hold is that you're not "excessively"
realizing capital gains, so you can keep more of your money invested--a nifty extra 15% plus for long-term investing.
 
In contrast, the Cruise Control Portfolio (CCP) is better for turning over your investments (like in a Roth IRA where you don't have taxes on capital gains eating at your investment income). 
This begs the main question, could one make the CCP approach work better than the Efficient Frontier approach in the face of capital gain taxes and short-term investing?
 
  I would be very interested on a study about that, but the CCP strategy needs to be better defined before such a study can be made.
 
 What's CCP really optimizing (relative to risk, profit, etc.)
and over how long?  Also, if it's a parametric method, what kind of signal conditioning is necessary (removing stochastic noise) prior to the analysis?
 
I still think you should publish a journal article about CCP.  If you don't want to write it yourself (I realize you're retired), get a colleague to co-author it with you.  :)
 
Love your website.  Happy MatLab'ing, (Superticker2)

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  Superticker2,

      Enjoyed your comments and posted them on my web page. Hope that was OK. About the CCP computations, I'm basically unhappy with classical statistics as applied to stochastic processes. So I have attempted to build my own optimization process that has nothing to do with regression or statistical processes or parameter estimation and filtering. It really is a work in progress, but it seems to work.

The question you pose about Efficient Frontier vs CCP is an interesting one. I suspect it's possible for the CCP process to produce better results than the Efficient Frontier approach, but it would entail a very heavy trading discipline that most investors could not or would not do.
                Good Trading
                   Schippi

 

07/10/07 Email question from Richard.
In your MPT graph, is Medical-Delivery (FSHCX) what you intended ????

Richard,
The MPT results posted come directly from the MPT Efficient Frontier extensive computations. Keep in mind that this is a much different mathematical criteria then what I use in the Cruise Control Portfolios (CCP). The Efficient Frontier results, try to choose a combination of sectors that produce the maximum gain for a specified amount of risk. It does so by choosing to combine sectors so the overall volatility of the selected portfolio is smoothed out.

 You may not like it's selection of sectors but inspection of the resulting portfolio chart seems quite satisfactory.
Hope this helps

                         Schippi