About This Tool
This tool helps you build optimized portfolios by applying different risk-based optimization models. Each model uses a distinct approach to risk and return, providing alternative portfolio allocations based on your risk preferences. You can customize the asset symbols for your analysis or use the preselected default symbols. The model will be trained on two years worth of return rates.
Model Descriptions and Parameters
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CVaR (Conditional Value at Risk): CVaR is a risk measure that focuses on the expected loss given that losses have exceeded a certain percentile, controlled by the
alpha parameter (0.05). A lower alpha value means a higher focus on extreme losses.
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EVaR (Entropic Value at Risk): EVaR uses an entropic (exponential) function to capture the worst-case scenarios. The
alpha parameter determines the confidence level, and smaller alpha values emphasize the tail risk. Regularization penalties are added to encourage weight diversity across assets.
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CDaR (Conditional Drawdown at Risk): CDaR focuses on limiting portfolio drawdowns (declines from the peak value) over time. Similar to CVaR, it uses an
alpha parameter to control the degree of drawdown considered. Regularization terms are added to prevent over-concentration.
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Mean-Variance (MV): The classic Mean-Variance approach balances portfolio risk and return using a
risk_aversion parameter. Higher risk aversion values prioritize reducing portfolio variance over maximizing returns.
Performance Metrics and Interpretation
After training each model, we evaluate the resulting portfolios using several metrics:
- Annual Return: The average return the portfolio is expected to achieve annually. Higher values are preferred.
- Annual Volatility: Measures the risk or variability of returns. Lower volatility is generally preferred, as it indicates more consistent performance.
- Sharpe Ratio: Indicates return per unit of risk. A higher Sharpe Ratio suggests a more efficient portfolio with better risk-adjusted returns.
- Sortino Ratio: Similar to the Sharpe Ratio but focuses on downside risk. A higher Sortino Ratio indicates a portfolio that minimizes losses effectively.
- Max Drawdown: The maximum observed loss from a peak to a trough of the portfolio. Lower values (less negative) are preferred as they indicate a more resilient portfolio.
Use these metrics to assess the trade-offs between return and risk for each model. For example, higher return portfolios may also have higher volatility or drawdowns, while low-volatility portfolios might achieve lower returns.