BLSH Model - Half-a-Loaf Case

The graph shown here are for the Half-a-Loaf case. The colored lines are the four simulated results for SPY, total assets, risky capital, and cash reserve values.

In this case, there were more cash than risky asset at the beginning (2:1 ratio). The are negative values for the risky asset (meaning short positions are required for this simulation case). It is very clear a simple short strategy might not work well in actual operations. In real operations, taking short positions in a bull market needs a lot of confidences. So we feel we might not be confident enough to do so in actual mangement of portfolios.

However, we can gain insights from this case. Some of the current understandings are the followings.

(1) The ratio between cash and risky asset is very critical when setting up the initial portfolio positions. When there is too much cash relative to risky asset, we can easily run into a situation when we do not have enough shares to sell when the market continues going up as shown in this half-a-loaf approach.

(2) The total assets curve is very statble over the entire simulation period. It is more or less close to a straight line. This means the volatility for this case is very low. We can carefully device a balanced portfolio with very little volatility for the most conservative investors based on this case with improved parameters to control shares investing in the risky asset.

(3) Based on the previous three simulation models, we become more confident that we can optimize model parameters to improve the overall model results. The appropriate ranges for the basic parameters should be within the range already used in the three models.