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Momentum investing, portfolio optimisation, and diversification

By Rujeko Musarurwa

It is nearly impossible to get the right mix of stocks to achieve maximum returns. A lot of time and effort has been spent trying to renovate and build upon old theories in order for investors to gain maximum returns. Wouldn’t it be ideal to be able to invest in stocks that are increasing in price and will continue to increase into the future? How much more would it benefit investors to know the right moment in which to shift stock weights i.e. buy or sell a stock in order to gain higher returns? These are just some of the questions that I will aim to answer.

This will be the first article in a 4 part series of articles. I will attempt to come up with a portfolio that will provide the best returns for momentum investing whilst actively managing the portfolio. In this first article I will be discussing the combination of momentum investing, portfolio optimisation and diversification and despite some researchers disagreeing with these two theories working together, most researchers agree that combination of strategies work well together and I will discuss how and why these specific strategies can work jointly. The second article will discuss the diversification method and give you an insight on how to pick the correct stocks and correct number of stocks followed by a third article that will discuss the portfolio optimisation area i.e. the risk-return tradeoff that should give the best stock selection by using normal distribution formula and other methods. The fourth article will combine all the topics previously discussed in order to formulate the ultimate model and discuss why the model should work. Read more

Trading Systems: A New Approach to System Development

Trading Systems

Trading Systems: A New Approach to System Development and Portfolio Optimisation
By Emilio Tomasini & Urban Jaekle

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