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Portfolio123 » List all forums » Forum: Errors » Thread: Maximum weight deviation error during rebalancing |
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p123robert
Advanced Member CANADA Joined: Nov 7, 2005 Posts: 372 Status: Offline |
Hi, MARCO and CREW, Please fix the script. The "Add Cash" feature is NOT working real well. After we add cash, and rebalance, the maximum weight deviation (MWD) is the issue. Here's the good part: It will let you add cash to your port. Which is great. Here's the bad part: While it's rebalancing, the script "thinks" that if MWD <= 50%, MWD can be > 93%. EXAMPLE: http://68.166.82.230/port_summary.jsp?portid=256031, a $100K port we call "Luca's Portfolio" . It has got... *** 1 stock weighting 30K, *** 1 stock weighting 33K, *** 1 stock weighting 37K, and an *** MWD <= 50%. Now we... 1) Sell the 33K stock, and also 2) Add 25K cash. 3) This creates an excess cash of (33.1 + 25 =) 58.1K. After this, we 4) Rebalance. Now, during the rebalance, the port should spend a maximum (1.5 * 30K =) 45K on the 3rd stock. However, the port spent 58.1K on the 3rd stock. Thus our rebalancing created an MWD of (58.1K / 30K = 1.94 =) 94%. 5) Now we've got *** 1 stock weighting 30K *** 1 stock weighting 37K, and *** 1 stock weighting 58.1K. 6) Was the MWD <= 50% rule ever enforced? No, I don't think so. I hope this helps. Robert |
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DennyHalwes
Advanced Member UNITED STATES Joined: Apr 28, 2004 Posts: 1532 Status: Offline |
Robert, The MWD is a function of the total market value of the Port divided by the number of stocks. Your port has 3 stocks and, after you added the 25K cash, $125,000 market value. $125,000 / 3 = $41,666. $41,666 * 1.5 = $62,500. So a new stock can be bought with up to $62,500 within the limits that you set. Denny  ---------------------------------------- "The significant problems we face cannot be solved at the same level of thinking that we were at when we created them". Albert Einstein |
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p123robert
Advanced Member CANADA Joined: Nov 7, 2005 Posts: 372 Status: Offline |
Hi, DENNY, Interesting. You're using a different definition. You have a different approach, because you're using a different definition for this MWD. Your definition of MWD is different from the one that I used. Differences are understandable, because, so far, according to my research, the MWD has never been defined anywhere on this P123 site. Using your definition, one stock one can be twice as heay as another stock, and still satisfy the 50% rule. And, IMO, the latter doesn't seem to be right. Hi, MARCO and ALL, One challenge is, there's nothing we know for sure, and we can only guess. Example #1: We notice that, even if we allow MWD = 50%, whenever we run SIMS, the actual weight of stocks never seem to differ more than 1 or 2%. Therefore, we conclude, these MWDs must be insignificant and SMALL. Example #2: Whenever we look for a definition of this WMD, we find it nowhere on this site. According to my research, this MWD has never been defined anywhere on this P123 site. Therefore, we conclude, these MWDs must be insignificant and/or SMALL. Example #3: One other challenge is that the script that runs our sims remains invisible to us, users. Therefore we don't know what definition of MWD is translated into the script. Example #4: We can spend a bit of time and experiment. For example, if, in the above example, we add not $25K cash, but $33.4K cash, and then we see that the script allows the purchase of $66.5K worth of the 3rd stock. This means that one stock can be worth 66.5K+, while another stock is worth only 30K. What alarms me is this surprise ratio of (66.5 / 30 =) 2.22, which, based on examples #1 and #2, doesn't seem to be right. This was what prompted the start of this thread. I hope this helps. Robert |
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DennyHalwes
Advanced Member UNITED STATES Joined: Apr 28, 2004 Posts: 1532 Status: Offline |
Robert, I think that the confusion is only a result of the way you are thinking about the cash you added. When you start a Port or Sim it initially divides the total investment by the number of stocks, and therefore buys an equal $ amount of each stock independently of the MWD. The MWD is used in the future buys to determine how far from the desired amount that a new buy can be. It is always a % of the total investment amount. The desired amount is the total investment amount divided by the number of stocks. The desired amount increases proportionally as the total investment increases due to either a gain in the prices of the stocks that the Sim or Port holds, or due to the addition of cash. There is no difference in the way it is calculated based on stock gains or added cash. If you have a $100K Port that increases in value to $125K due to the increase in price of one stock while the other 2 stocks remain around $33K, and that one stock is sold, then you will have $59K in cash. The Port will either buy 2 stocks at $29K each (if there are 2 stocks that meet all your Buy Rules) or one stock at $59K. Either case will be within + or - the MWD of 50% of the new desired value of $41.7K. This will result in the $ amount of the new stock being greater than 1.5 times the value of your other 2 stocks, but the same thing will happen if one or more of the other stocks that the Port is holding falls in price significantly. If for some reason you need the $ amount of all your stocks to be more equally distributed you need to tighten up the MWD value. However, that might cause your Sim/Port to hold cash periodically if the cash available to buy stocks is greater than the limits the WWD value allows. Denny ---------------------------------------- "The significant problems we face cannot be solved at the same level of thinking that we were at when we created them". Albert Einstein |
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p123robert
Advanced Member CANADA Joined: Nov 7, 2005 Posts: 372 Status: Offline |
"Thinking" doesn't create "confusion". It's a **lack of information** that does. I thank you for the much needed **information**. You do seem to have access to information on P123 that no one but Marco and his Crew could have known. Robert |
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DennyHalwes
Advanced Member UNITED STATES Joined: Apr 28, 2004 Posts: 1532 Status: Offline |
Robert, I have no inside info with the way Marco has set up the P123 tools. The information I present in the Forum comes from 3 years experience in using p123 tools, and my personal testing of the tools to determine how they actually work. Denny ---------------------------------------- "The significant problems we face cannot be solved at the same level of thinking that we were at when we created them". Albert Einstein |
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Re: Maximum weight deviation error during rebalancing
Re: Maximum weight deviation error during rebalancing
