Tactical Asset Allocation Through Random Walk on Stock Network

• Washington Burkart Freitas UNICAMP
• João Roberto Bertini Junior UNICAMP

Resumo

Tactical asset allocation is an essential method for defining a profitable portfolio for a given period. An analyst usually creates a tactical asset portfolio through technical analysis, a process subjective to the analyst’s knowledge and interpretations. Another aspect that can directly influence the quality of a portfolio is the number of assets considered for analysis. Human analysts tend to focus on a pre-defined group of assets, limiting choices, and, consequently, the possibility of better results. This work proposes the Stock Network Portfolio Allocation (SNPA) algorithm for the automatic recommendation of a stock portfolio, aiming to maximize profit and minimize risk. The proposed method considers a possibly large set of assets represented as a complex network. In which the nodes represent assets, and the edges stand for the correlation between their returns. Portfolio allocation is done through a random walk on the stock network, selecting, in the end, the most visited nodes (stocks). We conducted investment simulations on Brazilian stocks from the IBrX100 index, for 24 month periods, from Jan. 2018 to Dec. 2019. We compare the results with portfolio strategies: Ibovespa index (IBOV), classic Markowitz’s mean-variance portfolio (MV), Mean Absolute Deviation (MAD) portfolio, Conditional Value at Risk (CVaR), and Hierarchical Risk Parity (HRP). The Shape Ratio (SR), Maximum Drawdown (MDD), and Cumulated Wealth (CW) were used as performance metrics. The SNPA algorithm demonstrated its effectiveness, presenting a CW of 236.3%, being 203.5% above MV portfolio; 181.7% above CVaR portfolio; 175.6% above MAD portfolio, 184.6% above IBOV index, and 165.1% above HRP. SNPA also surpassed the benchmarks considering the performance metrics SR and MDD, with values 0.67 and −1.37 respectively, the best results among the benchmarks were observed by the HRP strategy, with 0.48 in SR index, and MV with −1.39 in MDD index.

Palavras-chave: Tactical asset allocation, Stock networks, Random walks, Portfolio management, Markowitz portfolio