PMSP Portfolio Optimizer

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

Functions

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

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

A Sample Run

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

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

Confirm Data Info

Set Dates & Goals

Time periods are month numbers in set (ex. 1-60 for 5 years of data)

Risk tolerance = % of assets in equities

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

Individual Stock Statistics

First screen when Correl selected Shows risk/return statistics for historical period Select second Correl button to see stock correlation

Correlation Table

Run Optimization

Once securities are selected and correlated by program

Different heuristics can be set to optimize and sort portfolios (under “Options”)

Optimization Results Can scroll to see other statistics using “Reports” and “Next” or

“Back” Can view individual portfolio statistics & holdings by selecting

“Individual”

Sample Portfolio

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

Heuristic Options

LPM Heuristic Optimization

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

Evaluate: Select Portfolios

Run Eval

Multiple graph options or Final End Period Report

Eval: Good Choices?

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