Wednesday, October 24, 2012

How to generate safe investment strategy?


I've wondering today whether it is possible to achieve a stable low risk equity line for a number for non-correlated investment strategies with mostly positive average returns and various individual volatilities.

Not all of the strategies needs to have positive averages - some very bad apples may happen in the portfolio:


Chart: Returns density of the worst strategy

When the number of combined strategies is low, it is quite easy to produce a loss:
Chart: 5 strategies

However, with the increase in the number of strategies, the equity line for the combined portfolio becomes stable. The problem is, the number of strategies you need to combine in order to achieve the desired result is quite large:

Chart: 1000 strategies
  

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