Portfolio Optimization
Systematic portfolio construction using factor analysis, stock selection methodologies, and rebalancing strategies applied to S&P 500 stocks.
Overview
Portfolio optimization combines quantitative factor analysis with systematic stock selection to build diversified portfolios. Our system implements 30 different strategies across multiple categories, each with distinct selection criteria and rebalancing frequencies.
Key Components:
- Factor calculation for all S&P 500 stocks
- 30 systematic portfolio construction strategies
- Multiple rebalancing frequencies (weekly, monthly, quarterly)
- Risk-adjusted performance metrics
- Category-based strategy comparison
Factor Analysis
Factors are quantitative metrics that capture different aspects of stock behavior and performance.
Momentum Factors
Measure price trends over different timeframes (1M, 3M, 6M, 12M). Positive momentum indicates upward price movement.
Formula: (Current Price / Price N days ago) - 1
Volatility Factors
Measure price fluctuation using standard deviation of returns. Lower volatility indicates more stable price movement.
Formula: StdDev(Returns) × √252 (annualized)
Quality Factors
Sharpe ratio measures risk-adjusted returns. Higher values indicate better return per unit of risk taken.
Formula: (Mean Return / StdDev of Returns) × √252
Trend Factors
Price relative to moving averages (SMA50, SMA200). Values > 1 indicate price above average (uptrend).
Technical Indicators
RSI (Relative Strength Index) measures overbought/oversold conditions. RSI < 30 = oversold, RSI > 70 = overbought.
Strategy Categories
Momentum Strategies
Select stocks with strongest recent price performance. Based on the principle that trending stocks tend to continue their trend.
- 1-Month Momentum Top 10: Fastest recent movers
- 3-Month Momentum Top 15: Medium-term trend followers
- 6-Month Momentum Top 20: Intermediate trend capture
- 12-Month Momentum Top 10: Long-term winners
Low Volatility Strategies
Focus on stocks with stable price movements. Low volatility stocks often provide better risk-adjusted returns.
- Low Volatility 20D: Shortest-term stability
- Low Volatility 60D: Medium-term stability
- Low Vol + High Momentum: Stable stocks with positive trends
Quality Strategies
Select stocks with superior risk-adjusted performance and resilience.
- High Sharpe Ratio: Best risk-adjusted returns
- Low Drawdown: Minimal peak-to-trough declines
- Quality Composite: Combined quality metrics
Trend Following Strategies
Use moving averages to identify and follow established trends.
- Above SMA50 + Momentum: Short-term uptrends
- Above SMA200: Long-term uptrends
- Golden Cross: SMA50 crosses above SMA200
Mean Reversion Strategies
Capitalize on temporary price dislocations and oversold conditions.
- Oversold RSI: Buy when RSI < 30
- Max Drawdown Recovery: Stocks recovering from deep declines
Multi-Factor Strategies
Combine multiple factors for more robust stock selection.
- Momentum + Quality: Strong trends with good risk metrics
- Momentum + Low Vol: Trending stocks with stability
- Quality + Value: High-quality stocks at attractive prices
Risk Parity Strategies
Weight stocks inversely to their risk metrics for balanced risk exposure.
- Risk Parity by Volatility: Weight = 1 / Volatility
- Risk Parity by Drawdown: Weight = 1 / Max Drawdown
Rebalancing
Rebalancing is the process of periodically adjusting portfolio holdings to maintain target allocations or update stock selections based on current factor values.
Weekly Rebalancing
Most aggressive approach. Captures short-term opportunities but incurs higher transaction costs. Best for highly liquid, momentum-driven strategies.
Examples: Oversold RSI, Aggressive Momentum
Monthly Rebalancing
Balanced approach between capturing factor changes and managing costs. Most common frequency for momentum and trend strategies.
Examples: 1M/3M Momentum, Above SMA50, Volume strategies
Quarterly Rebalancing
Lower turnover approach. Suitable for quality, low volatility, and long-term strategies. Minimizes transaction costs.
Examples: 6M/12M Momentum, Quality, Low Vol, Defensive
Performance Metrics
Total Return
Percentage gain or loss over the backtest period. Measures absolute performance.
Sharpe Ratio
Risk-adjusted return metric. Higher is better. Values > 1 are good, > 2 are excellent.
Formula: (Portfolio Return - Risk-free Rate) / Portfolio Volatility
Volatility
Annualized standard deviation of returns. Measures portfolio risk. Lower is more stable.
Maximum Drawdown
Largest peak-to-trough decline. Measures worst-case loss scenario. Important for risk management.
Implementation Guide
1. Run Portfolio Optimizer
python engine/src/portfolio_optimizer.py
2. View Results
Navigate to /portfolios to see:
- 30 strategy performance comparisons
- Risk-return scatter plots
- Category-based analysis
- Individual equity curves
- Stock factor analysis
3. Customize Strategies
Edit portfolio_optimizer.py to:
- Add new factor calculations
- Create custom selection rules
- Modify rebalancing frequencies
- Adjust portfolio sizes
Best Practices
- Diversification: Use 10-30 stocks to balance concentration and diversification
- Factor Combination: Multi-factor strategies often outperform single-factor approaches
- Rebalancing Frequency: Match frequency to strategy timeframe (momentum = monthly, quality = quarterly)
- Transaction Costs: Consider costs when choosing rebalancing frequency
- Risk Management: Monitor volatility and drawdown, not just returns
- Backtesting: Test strategies over multiple market cycles
- Factor Decay: Some factors lose effectiveness over time; monitor and adapt