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Allow position weighting by rank and/or market cap
Currently, all P123 simulations and portfolios use equal position weights, at least to begin with. However, I think it would be useful to be more flexible:
Weighting by marketcap: It would be nice to be able to increase the allocation to large cap stocks, simply because they are more liquid. Currently I am running multiple portfolios, one for small, one for medium, and one for large cap stocks, each getting progressively larger to take advantage of the excess liquidity of large cap stocks. This is a rather inelegant solution. Weighting by marketcap would be a way of keeping slippage under control while maximising potential returns.
Weighting by rank: Quite often I have talked about the need for diversification, but there is one problem: The more stocks you have in the portfolio, the further down the rank list you have to choose. I think it would be nice if you could have a large portfolio of stocks, most heavily concerntrated in the top ranks, then trailing off as further down the ranks. This would have an additional advantage: Purchases and sales could be spread out over time. Rather than having a "sell all" rule, weights are cut as the rank position declines. This would reduce the $ amount per trade, which again helps to reduce slippage. I believe that a portfolio weighted by rank would come much closer to the "efficient frontier" than an equal weighted portfolio. (but I don't know for sure- would be nice to test!)
Combining the two: Index funds are weighted my marketcap. It might be nice to test the effects of trying a portfolio the index fund and slightly re-weights it, such as the new "fundamental weighted" index funds that are starting to appear. Although returns are likely to be much more modest than a typical p123 simulation, I do believe it could be useful as a lower risk approach: Reweighting an index does not require making big bets on particular styles, such as "growth" or "value", since it still holds all stocks in the index. Such a portfolio could form the cornerstone of a more conservative investor such as someone saving into an IRA.
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