Portfolio with Quantitative Trading

Quantitative trading is a trading strategy based on quantitative portfolio analysis. It relies on mathematical calculations and number crunching to identify trading opportunities.

There are 2 ways to profit in the world of investing.

Ways to Profit from Investing

1. Capital gains. Examples: stocks, foreign currencies, crypto, commodities
2. Dividends. Example: stocks

Products Based on Quantitative Trading

Examples of digital investment platforms available in Malaysia:

1. Wahed Invest
2. Raiz
3. StashAway
4. Best Invest

Types of Trading Assets

1. Stocks
2. Indices (example: FTSE)
3. Foreign currencies
4. Commodities
5. Futures
6. Loan Notes / Bonds
7. Crypto

Types of Long-Term Growth (LTG) Asset Portfolios

1. Gold
2. Indices
3. Bonds / Sukuk
4. Crypto

Beta Value in Finance

The beta of an investment security is a measure of the volatility of returns compared to the overall market. Additionally, beta is also used as a measure of risk in investing.

The Capital Asset Pricing Model (CAPM) describes the relationship between expected returns and risk in investing.

CAPM shows the return of a security with a risk-free return (risk free assets) and a risk premium.

Company counters with higher beta values will have greater risk and greater expected returns.

The following are the meanings of the beta coefficient indicators: beta = 1 indicates a volatile market, beta > 1 indicates returns are more likely to react to market movements, beta < 1 indicates returns are less likely to react to market movements, beta = 0 indicates no correlation with the market, beta < 0 indicates a negative correlation with the market.

This is an example of risk analysis using the Beta indicator in TradingView.

The beta value on 16 March 2020 was beta = 2.797, which is beta > 1, meaning returns are more likely to react.

Compared to a Beta value < 1, returns are less likely to react to current market movements.

Additionally, factors that influence a country''s inflation and GDP include:

1. Risk premium (lambda)
2. Beta
3. Return (Ri)

For example, if the risk premium value lambda = 0.01, it means a 1% increase in inflation rate due to a 1% increase in lambda.

Zero Risk Investment

In theory, there are several types of investments that provide returns without risk. Through the CAPM model, there are 2 types of risk-free returns or risk free assets:

• Fixed deposit
• Loan Notes / Bonds

Asset Diversification

In stock investing, we need to diversify asset types to reduce risk. Investors can diversify assets in their investments through the Markowitz Model.

Unsystematic risk (USR) can be eliminated. Asset diversification and systematic risk (SR) cannot be eliminated. This shows that at this level, investors must accept the risk as it cannot be removed.

Purpose of Choosing Digital Investment Applications

The reasons investors choose long-term investments through digital platforms compared to traditional investments:

• No need to waste time selecting investment assets
• Can reduce transaction costs in trading investment assets

Long-Term Investment

Investors can choose long-term investments to:

• Enrich asset types through portfolio diversification techniques
• Reduce the number of transactions to minimise broker fees

Frequently Asked Questions (FAQ)

1. What is quantitative trading?

Quantitative trading is a trading strategy that relies on quantitative analysis using mathematical calculations and statistical data to identify trading opportunities in the stock market.

2. How does quantitative trading help build a portfolio?

It helps investors make investment decisions based on data and numbers, not emotions. This technique also assists in portfolio diversification and reducing transaction costs.

3. Is quantitative trading suitable for new investors?

Quantitative trading requires a basic understanding of mathematics and statistics. New investors are advised to learn investment fundamentals first and practise paper trading before using this strategy.

4. What are the advantages of long-term investing in a quantitative context?

Long-term investing allows investors to diversify asset types in their portfolio and reduce the number of transactions and broker fees, resulting in more optimum returns.

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Want to build a solid investment portfolio? Open a CDS account with Mahersaham and start your investment journey today. Also download our free stock ebook for a beginner''s guide to investing.

Further Reading

• How to Buy Stocks on Mplus
• CANSLIM Technique - How to Find Good Stocks
• Risk Analysis Techniques for Stocks and IPOs for Smart Investors