1. PMSP Portfolio Optimizer

2. What is PMSP? DOS-based statistical analysis program Calculates correlation between securities over a historical period Optimizes portfolios of securities based on correlation and risk/reward statistics of portfolio as a whole Can be used to evaluate performance of portfolios over a “test” period

3. Functions Data (import and edit data) Setup (change parameters and options) Correl (calculate stock correlation) Optimize (create optimal portfolios) Eval (evaluate selected portfolios)

4. Definitions Lower Partial Moment A measure of downside risk Average of squared errors of below-average returns Skewness Whether data “leans” to one side of the mean Positive (right) skew → “Peak” of distribution to left of mean Kurtosis A measure of the variance and the tendency of the data to be near the mean (how high the peak of the distribution is) “Normal” kurtosis is 3 Higher kurtosis implies a “leptokurtic” distribution Lower kurtosis implies a “platykurtic” distribution

5. A Sample Run

6. Find Data CRSP (via WRDS database) Need text file with PERM numbers for each stock Download file with Monthly Returns (with or without dividends) and Value Weighted Index Save as.dat file

7. Select Data File Load data for selected period from CRSP database (.dat file format) Securities chosen must have existed during the entire historical and/or evaluation period or data for analysis will be incomplete Should also include data for benchmark (ex. S&P 500) Data file must be in same folder as program

8. Confirm Data Info

9. Set Dates & Goals Time periods are month numbers in set (ex. 1-60 for 5 years of data) Risk tolerance = % of assets in equities

10. Select Stocks from Set Program only analyzes certain number of securities at once May have to change stocks analyzed to find low-correlation securities to run in later steps “Select Active Set” under Edit Data; use security numbers to add/remove security

11. Individual Stock Statistics First screen when Correl selected Shows risk/return statistics for historical period Select second Correl button to see stock correlation

12. Correlation Table

13. Run Optimization Once securities are selected and correlated by program Different heuristics can be set to optimize and sort portfolios (under “Options”)

14. Optimization Results Can scroll to see other statistics using “Reports” and “Next” or “Back” Can view individual portfolio statistics & holdings by selecting “Individual”

15. Sample Portfolio

16. Alternative Optimization Nawrocki LPM Heuristic Need a LPM limit (ex. 8.00) Evaluates securities by Return/LPM ratios (higher ratios mean higher weights) May not return number of securities desired due to differences in optimization

17. Heuristic Options

18. LPM Heuristic Optimization

19. Evaluate: Select Portfolios Choose own criteria (i.e. Return/Semivariance ratio) Limited number of portfolios can be evaluated at once Must select using “Select” function in Optimize menu before using Eval

20. Evaluate: Select Portfolios

21. Run Eval Multiple graph options or Final End Period Report

22. Eval: Good Choices?

23. Final Notes Very memory intensive Needs to be in a “low-level” folder (don’t place it in a directory 6 folders in) Graphs will cause full screen Switch out using Alt + Tab Right click Task Bar tab and select Properties Change to Window under Display Options and apply change