Optimal Design of Risk-Controlled Investment Strategies

Abstract

We derive a model for the performance and risk analysis of algorithmic investment strategies that invest in a mixed portfolio of equity and money market, based on a frequent re-balancing algorithm that responds to changes in the volatility of the underlying equity market using a pre-defined response function. We analyze existing investment strategies before we derive the optimal response functions that maximize the expected return and the expected risk-return ratio of the investment scheme and give a mathematical proof as well as numerical evidence that these optimized investment schemes improve the performance and risk-return profile compared to the underlying equity markets, i.e. they are proven alpha generators.