Student Investment Fund Plan Overview

Student Investment Fund Plan Overview

MATT BRIGIDA

Associate Professor of Finance (SUNY Polytechnic Institute)

The Goal

Maximize return per unit risk: $max(\frac{Return}{Risk})$

What if we want to attempt to earn a higher return?

Leverage

This is the issue of separating the portfolio construction from risk preferences.

Trading Permissions

• I assume (and think it makes sense) that we only trade equities and debt (including ETFs and ETNs), and possibly LEAPS.
• Futures and options would require frequent trading. Uncovered option sales are dangerous.
• Crypto (Bitcoin) can be bought via ETF.

Approach

Top-Down

1. Determine asset allocation first (80% stock and 20% bonds for example).
2. Within each asset category, find misvalued assets.

Bottom-Up

1. Look for misvalued assets.
2. Asset allocation is purely determined by 1.

Market Neutral

• Market neutral strategies attempt to generate alpha.
• Examples are pairs trading, or other statistical arbitrage.
• Risk is generally low.

Holding Period

Risk and Return over Time

Generally, the longer your investment horizon the greater the ratio of your expected return to uncertainty.

Frequent Trading

Market making is a transaction business, and we lose the bid-ask spread each time we trade. We therefore should be very careful we don't transact too much.

High-Frequency Trading

Requires a very large investment in infrastructure.

Data

• Interactive Brokers API
• Public Sources (Yahoo Finance)

Forecasting with Data

• Expected Returns
• Correlations

Stress Testing

• Maximum Drawdown
• Downside Risk and Asymmetry of Returns

Portfolio Performance Evaluation

• Sharpe Ratio
• Information Ratio
• Jensen's Alpha