December 22, 2023 alon@alphaoverbeta.net

Portfolio Construction as a Cloud Service

Portfolio Construction Anlaysis - sample.

Portfolio construction is selecting and combining a mix of assets to achieve a specific investment objective.
Whether you are an individual investor or a professional portfolio manager, constructing a well-balanced portfolio is crucial for achieving long-term financial goals while managing risk.

The challenge for a financial application is that constructing and analyzing a portfolio requires a lot of work before the first result is visible. The analyst must have historical data, code the construction thesis, verify the thesis on historical data, and display the results.

Our financial service API aims at minimizing the required workload and focusing the analysis on the thesis itself rather than on the peripheral work, we do this by introducing a cloud financial service that enables portfolio construction and historical analysis in less than 10 lines of code, The purpose is to provide all the heavy lifting in a could service and financial API to the steps to construct the portfolio,

Let’s look at an example (Python code):

# create the portfolio manager to manage the portfolio we backtest
portfolio_api = PortfolioManager(key='DEMO', secret='DEMO')

# create a portfolio and connect to it
portfolio_api.create()

# add symbols to the portfolio
portfolio_api.add(symbol='SPY', quantity=100)
portfolio_api.add(symbol='BND', quantity=100)

# run a backtest on the symbols added before with the requested period and the requested time interval
bt_df, status_code = portfolio_api.backtest(period='5y', interval='1d')

In the above example, we use the alphaoverbeta API service to construct a PortfolioManager object, this object is later used for managing our sample portfolio.
In this example, we use the ‘DEMO’ tokens but you may use your own by signing up with the service.

the next call is to create the portfolio on the cloud and then subsequent calls to add stocks / ETFs to the portfolio with a specific quantity to be analyzed, a financial application may add as many stocks as required in any quantity.

Then the real magic happens when the portfolio uses an online backtesting engine to analyze historical performance over the requested history, in our case the historical data is for 5 years, then the timeframe is specified in the interval parameter, in our case we used daily bars.

And that’s it! the resulting portfolio is returned in a matter of seconds to the calling financial app to be analyzed as required.

Here are the analysis results from the current example:

Portfolio Construction Analysis – sample.

Portfolio Construction Analysis – sample.

This service allows apps to easily benefit from portfolio construction features such as:

  • Define your goals and risk tolerance:
    Clearly articulate your financial goals, such as retirement, education, or wealth accumulation.
    Assess your risk tolerance, considering factors like time horizon, financial capacity to withstand losses, and emotional comfort with market volatility.
  • Asset Allocation:
    Decide on the mix of asset classes that align with your investment goals and risk tolerance.
    Common asset classes include stocks, bonds, cash, and alternative investments.
    Asset allocation is a critical determinant of portfolio performance. It involves spreading investments across different types of assets to achieve diversification.
  • Diversification:
    Diversify within each asset class to spread risk. For example, in the stock portion of your portfolio, consider investing in different sectors, industries, and geographic regions.
    Diversification can help reduce the impact of poor-performing investments on the overall portfolio.
  • Risk Management:
    Understand the risk-return trade-off. Generally, higher returns are associated with higher risk.
    Utilize risk management tools such as stop-loss orders, position sizing, and hedging strategies.
  • Investment Selection:
    Choose specific investments within each asset class. For stocks, this may involve selecting individual companies or using mutual funds and exchange-traded funds (ETFs).
    For bonds, consider factors such as credit quality, duration, and interest rate sensitivity.
  • Rebalancing (Not Supported Yet):
    Regularly review and rebalance your portfolio to maintain the desired asset allocation. Market fluctuations can cause the original allocation to shift over time.

The example code is a part of the API Github repo here,

Trade Smart,

Alon