Ph.D - University of Florida (Gainesville) , 1969
Investment Management and the Computer: Limitations and Prospects
UMI AAT 0245218
The essence of investment management is the selection of efficiently diversified portfolios of securities at a given time which are expected to accomplish the investor’s goals, usually to obtain the highest possible return on investment while not exceeding some specified level of risk. The problem of the investment decision maker is to allocate a limited amount of investible funds to those few securities, from among an almost infinite array of alternatives, which appear most likely to do the job over some time into the future. A model, suitable for computer implementation, given some input data concerning present security prices, expected prices, expected dividends, expected variance in the price and dividend estimates, and expected covariance between and among each and every security, exists has been widely acclaimed as a theoretical construct but so far has not been put into regular use by institutional investors.
This study seeks to fill the existing information gap by presenting the results of a simulation of the model’s efficacy over three ten-year (1956-1965, 1957-1966, and 1958-1967) performance periods, using historical inputs. Seventeen portfolios are compared in terms of both realized holding period return and risk with both equal dollar and equal shares buy and hold strategies. One comparison portfolio, chosen ex post, represents optimal performance; another represents minimal performance. Two other portfolios, chosen ex ante, represent “market” performance, while two more portfolios represent mutual fund performance. Five more portfolios were chosen randomly from the 665 sample stock database. These portfolios are compared with six portfolios chosen by the computer implemented model. A further comparison with actual results of 100 large mutual funds is also made.
In all cases, the performance of the computer selected portfolios is statistically significantly superior to any and all others tested. Neither of the two strategies, equal dollar or equal shares, is statistically superior to the other. The study results provide sufficient evidence for acceptance of the primary hypothesis that the computer model could have been used during the late 1950’s to select portfolios for institutional investors that are superior to those actually selected. The secondary hypothesis that the S&P Stock Ranking is an operationally effective risk measure is also accepted.
The only significant limitations of the computer model uncovered by this study were that it is not suitable for frequent use by speculative traders because of its high cost as well as because it is intended for single point in time decision making and it is not suitable for investors who need to impose nonlinear constraints on their decisions.
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