I imagine defining asset-class groups might be a problem too, even if we do it statically based on our intuition, is it going to be Equity\bond\Commodity\FX or do we go deeper into commodities and split it into grains, metals, energy.. Doing grouping dynamically based on the current correlations would probably be even messier.. Maybe some static grouping and simply say that none of the asset-classes can ever take more than 50% of the risk and then it's first come, first served (I think stock people mostly do their allocations to the first X while there's capital, maybe with randomization in the backtest..). Also, with prioritization by forecast strength, if we're using capped forecasts, there's still a possibility of a situation when we have more +20 instruments than available capital and we're still forced to choose arbitrary from that group. Prioritization by the asset class first might help solving that, but there's still a possibility that there might me more equally-worthy candidates than available capital. Or maybe I'm focusing on the edge-case too much.. Would still be cool to have something more logical than just first come first served..
I decided to forego all the statistics and simply use a (1/n) split of the available risk capital over 6 asset classes: bonds, equity, agriculture, forex, metals and energy. Within some of the classes am I using subclasses: agriculture is split between grains and meat. Similarly have I split bonds in short and long term bonds. Short term bonds tend to have much lower volatility (because of smaller contract size) and would therefore prevent any long term bonds to have an open position. Within each (sub)class have I then defined how many open positions I allow. This is based on account size and the volatility of the contracts in this (sub)class. All in all a handicraft approach, without any mathematical or statistical foundation.
I've posted some more on this small account problem, this time on using a more systematic method to pick a static subset of markets. https://qoppac.blogspot.com/2021/06/static-optimisation-of-best-set-of.html I am going to have a stab at the more heuristic method of picking up positions until you are 'full' and see how that goes. Then I'm probably done on this subject. GAT
Clearly, no... I haven't done the analysis, and I don't really use MPT anyway, or trust Beta. But yes in theory, if you did this optimisation and found you should allocate more to these kinds of stocks then go for it. GAT
I gotta say I admire this. I'm 100% certain I could not resist running a backtest. I wouldn't change or tweak anything depending on the result, but I would run one. You did mention in a post in this thread a few days ago: Why not run a backtest and see if the backtested SR is better? And second, I didn't understand why would you not expect this to add value over your current set of instruments? Is it because you were picking your current instruments with an eye towards diversification and removing 10 markets and adding 2 news ones isn't that big of a change?
i Loved the post and the latest TTU episode. Very impressed with the incredible output - and all whilst the Euro Cup is on!