Portfolio Allocations

A well diversified portfolio can save you from risks which might not have been expected. And stock markets are always un-predictable. It can never be said in surity that the prices will behave a particular manner.

A simple way to diversify your portfolio to pick and chose stocks from different sectors and industries that are independent of each other. For example: Pharmaceuticals and Tires.

This helps in ensure that if Pharmaceuticals is down, Tires is there to save you.

Another problem people face is that how much capital they should allocate to which sector or stock. A simple intuitive logic suggests that allocate more capital of the stocks that have a higher probability of giving stable returns.
For example, there’s a stock that gives a backtest Sharpe ratio of 2.1 and a stock that gives a backtest result of 1.1, a simple allocation of the capital can be in the ratio of 2:1, i.e. you are allocating double the capital to the stock having higher Sharpe against the other.

On the technical side, there are some methods to that can automatically decided on the capital allocation based on parameters like Expected Annualized Returns and Volatility. We have incorporated 2 such methods in our backtesting system which are:

• Markovitz Portfolio Optimization
• Sharpe Model

Both these methods work in such a manner that they allocate the maximum capital to the stock that gives the highest returns with a balanced risk. So, its always better to use these methods to allocate and safeguard your capital from risks.