DMS-COPAgendaGoals TerminologyTerminologyTerminologyRequirementsRequirementsExampleVerification ResultsQuestions?DMSDMS--COPCOPENSE623 – Verification and Validation November 28, 2006By:Ali PilehvarSuman SampathDecision Making System for Constructing Optimum PortfolioAgendaIntroduction Problem StatementIdeal SolutionGoalsTerminologyRequirementsSystem BoundaryUse case AnalysisSystem StructureClass DiagramSystem BehaviorActivity DiagramsState ChartModel Presentation (In Excel/VBA)Buy/Sell DecisionsObtaining the number of sharesOptimization to get the minimum portfolio risk satisfying the expected returnValidation and Verification (In Matlab)Efficient FrontierModelNext Steps…Problem StatementRequirementsSystem BehaviorModel PresentationSystem StructureIntroductionIntroductionValidation & VerificationGoalsNext StepsIn today's financial marketplace, a well-maintained portfolio is vital to any investor's success. As an individual investor, you need to know how to determine an asset allocation which best conforms to your personal investment goals and strategies. In other words, your portfolio should meet your future needs for capital and give you peace of mind. Investors can construct portfolios aligned to their goals, their risk aversion and investment strategies by following a systematic approach.TerminologyIdeal SolutionTo create a simple model-based program which can assist an individual investor to firstly construct an optimum financial portfolio to make more capital gain based on set of criteria and rules and secondly give his/her the tool to decide how to manage portfolio from the perspective of selling, buying and keeping portfolio’s securities according to the risk-return characteristics that best suit one’s preference and financial objectives.RequirementsSystem BehaviorModel PresentationSystem StructureIntroductionIntroductionValidation & VerificationGoalsNext StepsTerminologyGoals - The system must be efficient- The system must be economic- The system must be user friendly- The system must be secure- The system must be capable of getting the most optimal portfolio. - The system must be capable of getting the minimum risk with an expected return.- The system must be able to give appropriate signals tobuy/sell/hold based on the market analysis.- The optimal portfolio should be consistent with MarketresultsRequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsGoalsNext StepsTerminologyTerminologyPortfolio - The group of assets - such as stocks, bonds and mutual funds - held by an investor. Rate of return - A key measure of investors’ success is the rate at which their portfolios have grown during the investment period. Risk – standard deviation from the mean. It also represents the volatility of each stock.ADX – Average Directional Index: An indicator used to determine the strength of the trend. It is measured on a scale between zero and 100.DMI - Directional Movement Index: Component of ADX indicator. Helps in buy/sell determination.Trending – When a particular asset’s direction continues to move in one direction into the future.MA – Moving Average: An indicator showing the average value of a stock price over a set period.ADXMARequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsNext StepsTerminologyTerminologyTerminologyOscillating – Erratic moving behaviour of a particular asset.%K line – component of stochastic indicator: moving average of 5 to 10 day period%D line – 3-period moving average of %K line.Bollinger Band – A band plotted two standard deviation away from a simple moving average. When markets become more volatile, the bands widen and vice versa.Ticker – Name of the stockClosing Price – The price at the end of the day.Volatility - A statistical measure of the dispersion of returns for a given security or market index. Weights of Stocks - The total value of each stock in the portfolio which is simply the multiplication of number of each stock‘s shares by their prices divided by the total value of portfolio. StochasticBollingerRequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsNext StepsTerminologyTerminologyTerminologyEfficient Frontier – Intersection of the set of portfolios with minimum variance and the set of portfolios with maximum return.RequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsNext StepsTerminologyTerminologyRequirementsRequirementsRequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsNext StepsTerminologyRequirements investorStock data baseDaily MarketGet Investor informationDo Optimization toobtain the best portfolioCalculate the Number ofeach stock in the portfolioShow the Investor theOptimum portfolioObtain historical datafor chosen stocksPerform financialmarket analysis foreach stockMake Buy, Sell and Holddecision for each stockRequirementsRequirementsSystem BehaviorModel PresentationSystem StructureIntroductionValidation & VerificationGoalsNext StepsTerminologySystem Structure – Market AnalysisClass histDataticker:Charday:Date = sysDateopen:Numberhigh:Numberlo w:N umbe rclose:Numbervolume:Numbersheets()Class Signalsell:Booleanbuy:Booleanhold:BooleanrunMo del()Class CalculationsgetHistData()getADX()Class ADXtrendingoscillatingmeanValue = 15indicatorType()compare()Class BollingerupperBandlo we rBa ndclosin gPricepercentKpercentDcalcBand()Class DMIposDMInegDMIcalcMov()<<uses>>RequirementsSystem BehaviorModel PresentationSystem System StructureStructureIntroductionValidation & VerificationGoalsNext StepsTerminologySystem Structure – OptimizationClass histDataticker:CharReturn s :PercentclosePrice:CurrdataSheets()Class OptPorttargetReturnnumShare:IntoptRisk:intoptW eightgetHistData()getObjModel()getOptWeight()getOptRisk()Class ObjModelupperWeightlowerWeightminexpectedreturncalcVar()calcCov()calcoptweight()<<uses>>Class NumShareclosePricebudgetoptWeightgethistData()getObjModel()numShare()Class OutputTicker:Charbudget:NumbernumShareoptRisk:intoptW eightgetOptPort()RequirementsSystem BehaviorModel PresentationSystem System StructureStructureIntroductionValidation & VerificationGoalsNext StepsTerminologySystem Behavior – ADXGet Price(HIstorical Data)ADXPerform MovingAverage CrossoverCalculationPerform StochasticCalculation[if ADX>15] [if