- The new PSS Software Package is the most powerful investment diversification and asset allocation software package available today. PSS gives the user more quantitative portfolio selection ability than is currently used by the largest and most sophisticated investment funds.
- PSS is portfolio optimization and construction software that uses the Digital Portfolio Theory model to add an analytic measure of memory to Modern Portfolio Theory. Portfolio return is maximized while constraining portfolio variance, covariance, and autocovariance in a stand alone desktop application.
- The PSS software package offers substantial capability for investment managers and pension sponsors to analyze and optimize his or her portfolio of assets.
- The PSS Software Package utilizes a completely new form of stochastic programming particularly and uniquely suited to financial random process. The Digital Portfolio Theory, signal processing model of stochastic programming has not previously been applied to financial systems.
- Long term financial risk is broken into monthly, quarterly, 6-month, annual, 2-year and 4-year variance components. Exposure to these calendar risk levels observed in the financial markets can be controlled in the investor’s portfolio using the Digtial Portfolio Theory financial engine contained in the PSS Software Package.
- The PSS optimization package simultaneously performs optimal fundamental analysis using earnings growth, change in earnings growth, dividend yield, P/E ratios, market capitalization or firm size, and book to market value.
- Digital Portfolio Theory promises to advance portfolio management to the same extent that digital systems theory is advancing speech processing, image processing and other areas.
- Large investment management firms, institutional managers, financial advisors, and third party software vendors will be interested in integrating the DPTTM optimization engine into their existing research and applications.
PSS supplies institutional state-of-the-art investment selection technology by utilizing the new DPTTM optimization engine in conjunction with digital signal processing to create optimal and reliable portfolio performance given the objectives and timing of its clients. PSS is seeking strategic partners who are interested in gaining the benefits of Digital Portfolio Theory proprietary intellectual property.
PSS Software Requirements:
- requires PC Pentium or better platform with floppy drive
- requires Windows 95 or higher
- requires Lotus 1-2-3 Release 4, or 5 for Windows
- requires What’sBest! Spreadsheet Solver Add-in by Lindo Systems
PSS Software Characteristics:
- solves the return maximization investment optimization problem for target levels of risk
- can select portfolios from up to an 8000 alternative security universe
- efficient portfolios are found using non-parametric linear programming
- more stable and reliable portfolios are found since quadratic programming is not used
- expected returns, variances, and cross correlations are estimated from historical data using digital signal processing to quantify risk
- measures risk relative to the index the user specifies as a performance benchmark
- controls the calendar and non-calendar risk of efficient portfolios as well as independently controlling systematic and unsystematic risk
- finds optimal portfolios based on earnings growth, change in earning growth, dividend yield, P/E ratios, size, and book to market value
- controls solution portfolio CAPM, and calendar betas
PSS Portfolio Selection System Release 2.0 is a spreadsheet software package for Windows that utilizes the Digital Portfolio Theory engine. PSS finds optimal portfolios by maximizing portfolio return while constraining calendar, non-calendar, systematic and unsystematic risk. Fundamental variables are simultaneously constrained and additional constraints can be added by the user. The PSS User’s Guide provides the mathematical definition of the Digital Portfolio Theory model as well as valuable intuition about efficient market timing.
The PSS software package is supported by the textbook PORTFOLIO MANAGEMENT.
- PSS uses Digital Signal Processing (DSP) to measure variance spectral density and cross correlations to find stable calendar and non-calendar risk estimates.
- PSS uses 16 years of monthly time series security returns or prices.
- PSS uses a 48 month return signal length to capture long memory effects.
- PSS uses the Welch DSP method to achieve highly significant calendar variance estimates.
- PSS uses a rectangular window for narrow spectral resolution.
- Welch DSP samples multiple realizations of return processes resulting in highly consistent and stable estimates producing more confident input data to the optimization process. Other methods loose the memory of calendar and non-calendar risk.
- Linear optimization of the DPTTM engine results in more robust diversified portfolios
User Supplied Data:
- PSS is compatible with any historical security database but does not supply financial data.
- The user supplies a spreadsheet file to PSS for each alternative security (stock, mutual fund, asset class, index, etc.)
- Spreadsheet files must contain 16 years of monthly time series of security returns, or prices.
- The user must specify the index that will be used to as the benchmark to estimate systematic risk.
- Each spreadsheet file may contain fundamental variable data values.
- Historical means and variances can be scaled or modified to reflect individual forecasts before optimization
- PSS provides an interface to Standard & Poor’s Compustat database
Capabilities and characteristics of the Digital Portfolio Theory portfolio optimization financial engine.
Portfolio Construction and Programming:
- solves for efficient long investment portfolios
- finds efficient long-short position portfolios
- finds efficient arbitrage portfolios
- controls calendar based risk
- controls non-calendar based risk
- controls long memory risk
Portfolio Selection Strategy Support:
- supports single period, mean-variance (MV) portfolio selection
- useful for efficient asset class allocation mix
- useful for efficient industry, or sector allocation
- useful for efficient style, or objective allocation
- can be used to maximize alpha and control tracking error
- PSS is appropriate for long term investment decisions only
- PSS computes long term historical estimates of mean, variance, and autocorrelation.
- includes time dependent risk, market risk, and fundamental risk in the optimization decision
- PSS cannot be used as a day trading tool
- PSS is not a technical analysis tool
- PSS is not an options trading tool
Timing Risk Analysis:
- controls January effect risk
- controls annual risk effects
- controls quarterly risk effects
- controls monthly risk effects
- controls presidential effect risk
- controls systematic risk
- controls unsystematic risk
- controls CAPM betas
- controls calendar betas
- controls long memory betas
Fundamental Analysis – PSS includes constraints that simultaneously control:
- earnings growth
- change in earning growth
- market capitalization, or firm size
- PE ratio relative to industry PE ratio
- dividend price ratio
- book to market value ratio
- additional fundamental variables can be added
Portfolio Management Constraints – optionally added by the user:
- budget constraints
- trading cost constraints
- portfolio size constraints
- liquidity constraints
- turnover constraints
- lower and upper bound constraints
- integer variables can be added to control fixed costs
In addition to the PSS software package site license, Portfolio Selection Systems provides ongoing portfolio optimization support and advice on a contract basis.
Portfolio Selection System: Digital Portfolio Theory
ISBN 977-19-3745-6 First Edition (1997)
1. Portfolio management.
2. Investment analysis.
Copyright © C. Kenneth Jones, 1997
For information: firstname.lastname@example.org