Wednesday 26 March 2025
For investors, choosing the right mix of assets for a portfolio can be a daunting task. With so many options available, it’s easy to get overwhelmed and make suboptimal decisions. A team of researchers has developed a new algorithm that simplifies this process by selecting the most promising assets based on their expected returns and risk levels.
The algorithm, called OSCAR (Optimized Sparse Cardinality Algorithm for Risk-averse Selection), uses a unique approach to identify the top-performing assets while minimizing the number of stocks or bonds in the portfolio. This is achieved by first identifying the optimal combination of assets without considering the constraint on the number of assets, and then selecting the top-scoring assets based on their expected returns and risk levels.
The researchers tested OSCAR using real-world data from six different stock markets, including the S&P 500 in the United States and the FTSE 100 in the UK. The results showed that OSCAR outperformed traditional methods by a significant margin, achieving higher returns while taking on less risk.
One of the key insights behind OSCAR is its ability to identify assets with lower correlations between each other. This means that the algorithm can create a portfolio with a more diversified set of assets, which tends to be less volatile and more resilient in times of market turmoil.
The researchers also found that OSCAR performed particularly well when applied to portfolios with a smaller number of assets. This is because the algorithm is able to focus on the most promising assets without being distracted by unnecessary options.
While OSCAR shows great promise for investors, it’s important to note that no algorithm can guarantee success in the markets. There will always be some degree of risk involved, and investors should carefully consider their own risk tolerance and investment goals before using this or any other algorithm.
Despite these limitations, OSCAR represents a significant step forward in portfolio optimization. By providing a more efficient and effective way to select assets, it offers investors a valuable tool for building and managing their portfolios. As the financial industry continues to evolve, algorithms like OSCAR are likely to play an increasingly important role in helping investors achieve their goals.
In the world of finance, the battle for alpha is ongoing. Alpha refers to the excess return generated by a portfolio compared to its benchmark or market average. In other words, it’s the Holy Grail for investors: beating the market without taking on excessive risk. While many strategies claim to deliver alpha, few can actually do so consistently.
Cite this article: “OSCAR: A Breakthrough Algorithm for Optimizing Portfolio Returns”, The Science Archive, 2025.
Investment, Portfolio Optimization, Algorithm, Oscar, Returns, Risk, Assets, Stocks, Bonds, Finance
