PMSP Portfolio Optimizer

1. PMSP Portfolio Optimizer

2. What is PMSP? • DOS-based statistical analysis program • Calculates correlation between securities over a historical period • Optimizes portfolios of securities based on correlation and risk/reward statistics of portfolio as a whole • Can be used to evaluate performance of portfolios over a “test” period

3. Functions • Data (import and edit data) • Setup (change parameters and options) • Correl (calculate stock correlation) • Optimize (create optimal portfolios) • Eval (evaluate selected portfolios)

4. Definitions • Lower Partial Moment • A measure of downside risk • Average of squared errors of below-average returns • Skewness • Whether data “leans” to one side of the mean • Positive (right) skew → “Peak” of distribution to left of mean • Kurtosis • A measure of the variance and the tendency of the data to be near the mean (how high the peak of the distribution is) • “Normal” kurtosis is 3 • Higher kurtosis implies a “leptokurtic” distribution • Lower kurtosis implies a “platykurtic” distribution

5. A Sample Run

6. Find Data • CRSP (via WRDS database) • Need text file with PERM numbers for each stock • Download file with Monthly Returns (with or without dividends) and Value Weighted Index • Save as .dat file

7. Select Data File • Load data for selected period from CRSP database (.dat file format) • Securities chosen must have existed during the entire historical and/or evaluation period or data for analysis will be incomplete • Should also include data for benchmark (ex. S&P 500) • Data file must be in same folder as program

8. Confirm Data Info

9. Set Dates & Goals • Time periods are month numbers in set (ex. 1-60 for 5 years of data) • Risk tolerance = % of assets in equities

10. Select Stocks from Set • Program only analyzes certain number of securities at once • May have to change stocks analyzed to find low-correlation securities to run in later steps • “Select Active Set” under Edit Data; use security numbers to add/remove security

11. Individual Stock Statistics • First screen when Correl selected • Shows risk/return statistics for historical period • Select second Correl button to see stock correlation

12. Correlation Table

13. Run Optimization • Once securities are selected and correlated by program • Different heuristics can be set to optimize and sort portfolios (under “Options”)

14. Optimization Results • Can scroll to see other statistics using “Reports” and “Next” or “Back” • Can view individual portfolio statistics & holdings by selecting “Individual”

15. Sample Portfolio

16. Alternative Optimization • Nawrocki LPM Heuristic • Need a LPM limit (ex. 8.00) • Evaluates securities by Return/LPM ratios (higher ratios mean higher weights) • May not return number of securities desired due to differences in optimization

17. Heuristic Options

18. LPM Heuristic Optimization

19. Evaluate: Select Portfolios • Choose own criteria (i.e. Return/Semivariance ratio) • Limited number of portfolios can be evaluated at once • Must select using “Select” function in Optimize menu before using Eval

20. Evaluate: Select Portfolios

21. Run Eval • Multiple graph options or Final End Period Report

22. Eval: Good Choices?

23. Final Notes • Very memory intensive • Needs to be in a “low-level” folder (don’t place it in a directory 6 folders in) • Graphs will cause full screen • Switch out using Alt + Tab • Right click Task Bar tab and select Properties • Change to Window under Display Options and apply change