Anti-Crisis Analytics Book

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FAStocks: Stock Portfolio Optimization

Thousands of companies are traded publicly. You can buy part of a company by buying its stocks. However, putting all your money into one stock can be risky. If the company fails you will lose your savings. People often prefer buying several stocks to make a profitable, diversified stock portfolio with acceptable risk. So, how do you build your stock portfolio?

FAStocks is a free and easy to use website where you can evaluate and optimize your stock portfolio in seconds. FAStocks collects historical stock prices from web feeds and evaluates optimal fractions of assets using a Modern Portfolio Theory by Harry Markowitz, a Nobel Prize winner

The theory extensively utilizes a concept of a beta coefficient. The beta coefficient indicates the correlation of the stock price with the whole market. For example, the beta coefficient of 1 means that the stock price changes exactly in the same way as the market index price like the S&P 500 index. If S&P 500 goes up and beta >1 then the stock price will grow up even higher but if beta <0 then the stock price will fall. When we talk about correlations we talk about historical stock prices and not the future values.

Beta coefficient multiplied by the market return is called expected return of the asset. In fact, the expected return is the stock price in the future subtracted by the stock price today. The expected return is an estimation. The real stock price varies in time which is called volatility. Volatility is a measure of risk that you take expecting a return. With the Modern Portfolio Theory you can maximize the ratio of the stock portfolio expected return to the stock portfolio volatility. The portfolio score you see at the FAStocks reflects this ratio. The higher the portfolio score the more balanced and profitable portfolio you have.

The portfolio profitability goes against the risk. In other words, most profitable portfolios with highest expected return often are the most volatile and risky. You can expect to earn a lot with a risky portfolio but you can easily go negative at the end because of the stock price volatility. So, making good portfolio is all about trade-off. You want to secure the highest possible profit at lowest possible risk given the list of the companies you decided to invest in. FAStocks uses complex mathematical algorithm that finds best possible combination of stocks in your portfolio using beta coefficients and other financial data. Optimal stock portfolio has the combination of stocks that guarantee highest expected return and lowest volatility.

On 2015, Scandinavian Institute of Business Analytics acquired FAStocks as a part of Anti-Crisis Analytics research program. The service is free for the end users.