Nov. 14, 2018                                   NEW BOOK RELEASED

I was preparing a follow-up to the last two articles (see related files). But then, from simulation to simulation, the article grew and grew. So much so that it is now a 160-page book filled with charts and equations. One would think that the whole thing would be complicated, but in reality, it took all that complexity and reduced it to a few guiding equations.

A new book is always exciting. Especially when you put so much into it, this one is special.

Those equations were sufficient to explain the whole ecosystem of evolving stock portfolios, from a portfolio's payoff matrix, which is gradually transformed into time functions. These equations become the foundation for building long-term portfolios using trading strategies. They give you what, in the end, will count. They will be able to guide your portfolio to meet your objectives.

My new book is now available on Amazon: Beyond the Efficient Frontier. A Stock Market Game You Can Play And Win.

 Beyond the Efficient Frontier

It is based on the same core program as used in the preceding 2 articles. I simply repurposed the code to make it a portfolio scenario builder. It gave the ability to reconstruct millions of portfolios composed of randomly generated stock prices made to mimic the real thing.

It enabled the study of the general behavior of long-term portfolios. And concluded that the best thing one can do is diversify a lot, be fully invested, and last a long time. The book provides the mathematical backdrop to corroborate those findings, which is most probably stuff you knew all along but now might give you a much better perspective of what needs to be done to get there.

Its main conclusion is that the efficient frontier might be a self-imposed limit since one could easily jump over it, as the following chart shows:

20,000 Portfolios With Upside Drift And Alpha (300 Stocks Each)

Note that in the process, the whole efficient frontier was raised higher. There are 20,000 portfolios composed of 300 stocks each in that vertical blue strip above the efficient frontier. That is, the 6,000,000 price series were generated using the random function in the notebook and passed to its optimizer. It is a sufficiently large sample to be statistically significant to represent what was going on.

Observe that all 20,000 portfolios are clustered together saying that they all achieved about the same level of risk and that you could have picked about any one of them and have a decent performance level.

It took a while to get there, but nonetheless, it ties in quite well with my previous work.

Instead of decomposing price series to see what they are made of to then design trading strategies based on what was found, I simply reconstructed price series from scratch using stochastic equations.

You could also generate the following chart (figure 8.3) from my book:

20,000 Portfolios (200 Stocks Each) With NO Trend

It draws quite a different conclusion. It says that without some upside bias, whatever its origin, the expected outcome is ZERO. All 20,000 portfolios would land in that small dot in zero land. In fact saying: no edge, no candy. It was totally expected since that was exactly the answer the optimizer had to give, which it did.

There is much to learn from the elaboration of all the tests performed. What you will find in the book is a coherent and structured ecosystem where everything is turned into equations. An equal sign is a powerful statement even in a randomly generated trading environment.

I hope you will find it more than interesting. It could change your perception of things, even if you already know all that will be presented. Its long-term perspective might help change your own perception of how to win the game. It is an innovative approach anchored in simplicity and common sense.

Related files:

The Capital Asset Pricing Model Revisited