A.I.M. Users Bulletin Board

[aptus]

Hi Steve,

"How would one go about selecting the candidates to start?"

I would select candidates based first on the criteria I like. These include, but aren't limited to, Earnings Growth, Cash Flow, Market Cap., debt, and volatility. I would be happy to invest in any company that makes this list.

Next I would sift through these and choose the ones that aren't in the same sectors. I'd also look for stocks that aren't highly correlated. From time to time I might also use the Sharpe Ratio to help me decide between two stocks that I like equally.

Finally I'd select the ones in which I will actually invest. As I mentioned previously (http://www.investorshub.com/boards/read_msg.asp?message_id=983734 ), I would limit myself to, at most, 10 stocks (currently I have 7 in my main portfolio -- not including the ones I speculate with and which are purely short-term holdings).

"Are there any actual results one could point to with respect to an actual set of holdings that were balanced using MPT and then let run? How did these results compare to the equal mix or other methods?"

There are no results for AIM, however there are examples all over the Internet that show diversification leads to significantly better results. However I've not found an exhaustive study based on strict statistical testing procedures.

Having said that, I've been looking at quantifying diversification for a couple of years now and am fully convinced that investors *must* do it if they want to limit their risk *and* increase their long-term returns.

I'm currently working on putting together a testing suite for AIM that will allow me to run proper backtests on the effects of systematic diversification. This will allow me to test the different diversification methods and obtain empirical evidence on their relative performance.

"Knowing your time zone, and noting the time of your post; I'm compelled to ask. Did you stay up all night to compose it?"

Actually I do much of my investment work late at night (I've been a night owl for as long as I can remember). Yesterday I was writing a portfolio optimizer and was just about to head off to bed when I decided to write that post.

I figured it might help someone since most people know diversification is good, but most don't know how to go about properly doing it.

From your previous posts I see that your investments are doing quite well so far this year. Congratulations!