PM3 Optimization

Three ETFs trade over three periods. The allocation is optimised across periods.

Objective

Find the allocation that gives the best return for the risk taken. Assessed on profit and loss.

What it shows

• Optimisation: the best weights for a given risk.
• An allocation that is optimal in one period and not in the next.
• The case for and against an optimum that depends on estimates.

Watch out for

• Trusting an optimiser's answer because it is precise.
• An allocation that changes every period for small gains.
• Extreme weights from small differences between ETFs.

Who takes part

• Investor — every student. Allocates 1,000,000 among EQTY, BOND and REIT, and adjusts the allocation across the three periods.

Class size

Any size. Each student optimises their own allocation; runs well after PM2.