We want to explain today with some detail how Optimo works and why we are so proud of our achievements in getting Optimo ready for the market. We’re also going to tell something about financial views.
While building a portfolio model, the most delicate phase occurs when subjective, qualitative evaluations of assets are to be converted in quantitive terms, i.e. numbers inside algorithms.
A second crucial point is adapting model portfolio to changing market dynamics.
Optimo aims at solving these situations and quantitatively expressing the preferences and choices of market operators, by using views.
Whatever Will Be, Will Be
Views are evaluations and forecasts made by market operators about the future asset class returns. Evaluations are expressed in terms of positive or negative fluctuations whilstviews receive a trust evaluation such as very likely to happen, fairly likely, less likely…
Optimo uses the Black-Litterman algorithm to translate trust and forecasts made by the operators to software parameters, that subsequently become portfolio choices.
Optimo works with three different kinds of evaluation: absolute, relative, and weighted views.
An absolute evaluation regards the behavior of an asset class independently of others…
The relative one expresses an evaluation made by a market operator about the return of a specific asset class in respect to another one, influencing its behaviour.
Finally, weighted views are sets of relative views, with reference to two portfolios of different asset classes.
The correlation between asset classes directly affects views by changing their expected returns.
The Efficient Frontier
The goal of Optimo is calculating the efficient frontier: the set of portfolios laying on the same frontier that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.
The use of views allows to reap sensible benefits. The biggest one is that results coming out of the use of views are financially sustainable: the indications that come from Optimo represent a great starting point for client’s investment.
Another advantage is the creation of more diversified portfolios containing several asset classes. These portfolios are more comprehensible both by market operators and clients, increasing transparency.
This is about the usage of financial views in Optimo. We will back soon with other aspects of this performing software.