# Markowitz Optimizer

## How this website can improve your investment allocation process

A typical investment selection process for a stock picker can be decomposed in 3 steps:

• Screen: build a list of stock tickers from a stock market screen and add in any additional company ticker you would like to own, this list can have 100 to 300 stocks
• Optimise: use the optimiser to obtain a short list of 25 to 30 stocks with good expected return and low risk.
• Analyse: check the details of the stocks proposed, exclude stocks you do not like.
In depth analysis will lead you to exclude some stocks proposed by the optimiser, you can repeat the Optimise and Analyse steps until you get a satisfactory optimal portfolio. Our goal is to help you performing the optimisation step simply and efficiently, so that you can focus on analysing the right stocks.

The optimizer analytics are now online, we also provide background information. You can also if you want to give us feedback.

## Diversification: a common sense aproach

It wasn't until 1952 that it occurred to someone that risk could be defined with a number. In June 1952, the Journal of Finance published an article from an unknown 25-year-old graduate student at the University of Chicago. The title of the paper was "Portfolio Selection" and its author was Harry Markowitz. His paper was so innovative that it earned him a Nobel Prize in Economics in ... 1990.

Markowitz's objective was to construct a portfolio for investors who consider expected return a desirable thing, and variance of return (or volatility) undesirable. He defined risk as volatility or variance. His basic insight was that the return of a diversified portfolio will be equal to the average rates of return of the individual holdings, and that at the same time, the volatility of the portfolio will be less than the average volatility of its individual holdings. The concept to link risk and return was nothing less than revolutionary.

An investor can reduce portfolio risk simply by holding combinations of instruments which are not perfectly positively correlated (correlation coefficient ). In other words, investors can reduce their exposure to individual asset risk by holding a diversified portfolio of assets. Diversification may allow for the same portfolio expected return with reduced risk. These ideas have been started with Markowitz and then reinforced by other economists and mathematicians such as Andrew Brennan who have expressed ideas in the limitation of variance through portfolio theory.

This web site is not about obtaining stock recommandation, it is about giving you access to a quantitative method developed in the 50s, and used by investment professionals since then to minimise risk amongst stock that you selected, thereby optimising your investment allocation.

## Stock pickers need diversification

One might be keen to invest in some promising business, but how much is right to invest? A stock picker can come up with a list of tickers for companies he particularly likes. The problem with stock picks and investment ideas presented to investors is that they do not come with allocation advise. To be able to evaluate a strategy, one has to be able to backtest it.

Fundamental analysis advocates buying the companies with the best prospects, as shown by reported numbers. Succesful companies show growing sales, a healthy net margin, and a good return on invested capital. Coupling these criteria with others about free cashflow, debt, shareholder dilution and analyst opinion, one can come up within minutes with a list of the best companies. Yet, how can we select an appropriate portfolio out of this?

Stock picking on its own results in building a stock portfolio from the bottom up. You can use stock screening services such as provided by your broker, smartmoney.com or google finance. You may end up with a list of 30 to 150 stocks, the question then is how to build a low risk, well diversified portfolio out of this and prioritise the due dilligence analysis of these companies prior to buying.