New families of universal portfolios and their performances

Kuang, Kee Seng (2022) New families of universal portfolios and their performances. PhD thesis, UTAR.

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Abstract

In the world of investment, various types of investment product are available for the investor to seek for long term investment return. These products include invest in real-estate, invest in foods and beverages, invest in bonds, invest in commodities and many more. Choosing the ’right’ asset to invest is difficult. Losses can occur if the chosen asset behaves in an unfavourable way. In the modern era, investors use portfolio in their investment strategy. A portfolio is a combination or collection of a series of financial instruments like commodities, bonds, stocks, cashes and etc. It is a method that commonly spotted in the market which it can reduce the risk significantly by not allocating all the capital into one basket. Portfolio helps to diversify the investor capital and allocate those wealth onto various options to prevent occurrence of huge loss due to unpleasant event. As an individual investor, we need to determine the optimum allocation for each of the components in the portfolio. A well-diversified portfolio is crucial for any investor to yield a higher return. Universal portfolio is a strategy of trading on stocks that does not assume any probability model for the stock prices. Universal portfolio is an investment technique where it helps us to generate portfolio vector to produce high wealth return in a long run. In this research, new possible ways to generate new universal portfolios are studied. Objective functions with different divergence have been tested to obtain the new universal portfolios. The purpose is to obtain the next-day stocks’ allocation of the portfolio which could maximize the wealth return.Next, the performance of the newly derived universal portfolios is studied by running these universal portfolios on some selected stocks from the Kuala Lumpur Stock Exchange (KLSE). These results will be compared with others and the performances are studied intensively. Beside comparing the performances, a new family of universal portfolios is developed. Most of the newly derived universal portfolios are linked to the universal portfolio generated by f-divergence and universal portfolio generated by Bregman divergence. These two universal portfolios are the general form of Helmbold universal portfolio. For numerical experiment of the performance of universal portfolio, it is shown that the newly derived universal portfolios can perform as good as Helmbold universal portfolio. The results of these universal portfolios show that it is possible to increase the wealth of the investor by using these portfolios in investment.

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