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Abstract
Various approaches were proposed to predict the future prices for the stocks. The dominant theory in today’s investment community is the Mean – Variance Portfolio Theory proposed by Harry Markowitz. This thesis explores a strategy for a frequent trader with some elements of Modified Portfolio Theory.
Given the nature of the stock market, which is considered to be a stochastic process, Constant Rebalanced Portfolio may not be the optimal strategy. An attempt was made to allocate the optimal wealth to certain securities based on probabilities obtained from generalized Wiener Process.
Another factor to consider is that the market does not always trend up. There are periods of time when the stock market declines considerably. The most recent example is the “financial meltdown” during late 2008 and early 2009, when the market dropped to the twelve year low and investors observed 40% decrease in their portfolios. To cope with this problem, we allow “short sell” in our portfolio.
Results show that on average our algorithm outperforms Buy and Hold strategy.
