Portfolio Optimizer
The Portfolio Optimizer computes optimal allocation weights for a set of instruments based on a chosen strategy. It combines traditional portfolio theory with PulseGrid™'s event-driven scores.
Optimization Strategies
| Strategy | Description | Best For |
|---|---|---|
| Risk Parity | Allocates so each instrument contributes equally to total portfolio risk | Balanced risk exposure; avoids concentration in volatile assets |
| Max Sharpe | Maximizes the Sharpe ratio (return per unit of risk) | Aggressive optimization seeking the best risk-adjusted return |
| Min Variance | Minimizes total portfolio volatility | Conservative investors prioritizing stability |
| Equal Weight | Assigns equal weight to all instruments | Baseline comparison; no optimization assumptions |
| PG Score™ Weighted | Weights instruments proportionally to their PG Composite Score™ | Event-driven allocation; overweights instruments with positive event momentum |
Output Metrics Explained
| Metric | What It Means | How to Interpret |
|---|---|---|
| Expected Return | Annualized expected return based on historical data and PG score projections | Higher is better, but must be evaluated alongside volatility. A 20% expected return with 50% volatility is less attractive than 15% with 20% volatility. |
| Volatility | Annualized standard deviation of portfolio returns | Lower is generally better. Values above 30% indicate high risk. Values above 100% suggest extreme concentration or leveraged exposure. Note: Very high values (e.g., 5000%) typically indicate insufficient historical data or extreme recent price movements in the sample period. |
| Sharpe Ratio | (Expected Return - Risk-Free Rate) / Volatility | Above 1.0 = good risk-adjusted return. Above 2.0 = excellent. Below 0 = the portfolio is expected to underperform the risk-free rate. A negative Sharpe ratio (like -0.05) means the expected return does not compensate for the risk taken. |
| Diversification | Percentage measure of how spread out the allocation is | 100% = perfectly diversified across all instruments. Lower values indicate concentration in fewer instruments. |
Instrument Details Table
| Column | Description | How to Interpret |
|---|---|---|
| Weight | Percentage of portfolio allocated to this instrument | The optimizer's recommended allocation. Compare against your current holdings. |
| PG Score | Current PG Composite Score | Negative scores (red) indicate unfavorable event pressure. The optimizer may still allocate to negative-score instruments for diversification purposes. |
| Confidence | Score confidence level | Low confidence means the PG Score is less reliable for this instrument. |
| Volatility | Individual instrument volatility | High individual volatility does not necessarily mean high portfolio volatility if correlations are low. |
| Exp. Return | Expected return for this instrument | Based on historical price data and PG score projections. Extreme values (300%+) suggest limited historical data or recent outlier moves. |
| Rationale | AI-generated explanation of why this weight was assigned | Provides context for the allocation decision. |
Interpreting the Example Output
Looking at the screenshot example (Risk Parity with AAPL, MSFT, GOOGL, AMZN at 25% each):
- Expected Return 147% with Volatility 5031% and Sharpe Ratio -0.05: This indicates the optimizer is working with a period of extreme market volatility or insufficient data. The negative Sharpe ratio means the risk is not being adequately compensated. This is a warning signal - the user should consider a longer historical window or verify the data period.
- All weights at 25%: Risk Parity defaulted to equal weight because all four instruments showed similar (extreme) volatility levels.
- Negative PG Scores: All instruments show negative PG scores, suggesting broad negative event pressure during the analysis period.
Action: When you see extreme volatility values or negative Sharpe ratios, consider (1) expanding the analysis time window, (2) adding lower-volatility instruments, or (3) using a different optimization strategy.