Real life implementation of modern portfolio theory (MPT) for financial planning and portfolio management

• US 20020138383A1
• Filed: 02/02/2001
• Published: 09/26/2002
• Est. Priority Date: 02/02/2001
• Status: Active Grant

• Current Assignee: Thomas A. Rhee
• Original Assignee: Thomas A. Rhee
• Inventors: Rhee, Thomas A.
• Granted Patent: US 7,536,332 B2
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 10/04 Forecasting or optimisation specially adapted for administrative or management purposes, e.g. linear programming or "cutting stock problem" market predictions or forecasting for commercial activities G06Q30/0202
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

An investment portfolio management method and system. The method is developed using mathematical models and implemented via the Intra- and Internet technology. The method is a comprehensive personal financial planning business model. With this method a conventional mean-variance efficient portfolio frontier analysis, which is often cited in Modern Portfolio Theory (MPT), one of the major scholarly developments in modern finance, finds its way into actual securities trading and rebalancing in real world. MPT is modified to allow various transactions costs, e.g. bid/ask spread, brokerage commissions, taxes, and others; as well as non-stationary securities return distributions to form efficient portfolios in real time by way of various portfolio rebalancing strategies. The system offers an automatic, mathematical solution for asset allocation and cash management in real time, while managing and trading on portfolios of each asset class, e.g. commercial papers, repurchase agreements, money market funds, bonds, stocks, mutual funds, and other derivatives on an auto mode.

Claims

1. A method of portfolio management comprising:

communicating with at least one investor through the Internet, receiving investment parameters from said at least one investor, and generating at least one portfolio according to said investment parameters.

2. The method of claim 1, further comprising:

rebalancing said at least one portfolio to generate a new portfolio.

3. The method of claim 1, further comprising:

formulating an investment index using Modern Portfolio Theory, ranking stocks in said investment index against said investment parameters, and generating at least one optimum scenario portfolio based on said ranking.

4. The method of claim 1, further comprising:

monitoring said portfolio to recommend at least one trade upon occurrence of a triggering event.

5. The method of claim 1, further comprising:

automatically executing trades in accordance with said investment parameters.

6. The method of claim 1, further comprising:

providing trade recommendations to the investor, which may be approved or rejected by the investor.

7. The method of claim 1, further comprising:

generating at least one optimal scenario portfolio in accordance with said investment parameters and current market conditions.

8. The method of claim 7, further comprising:

comparing expected returns of said optimal scenario portfolio with expected returns of at least one existing portfolio to provide trade recommendations.

9. The method of claim 1, further comprising:

generating a market index in accordance with said investment parameters.

10. The method of claims 8 and 9, further comprising:

comparing expected returns of said market index with expected returns of said optimal portfolio and said existing portfolio to provide trade recommendations.

11. A method of portfolio management comprising:

determining an optimal portfolio through the Internet by using investor questionnaires.

12. The method of claim 11, further comprising:

allowing investors to manage multiple numbers of funds simultaneously through the Internet.

13. The method of claim 11, further comprising:

providing educational materials associated with managing funds through the Internet.

14. The method of claim 11, further comprising:

managing at least one securities database with information comprising at least one of the following;

industry type;

exchanges traded on;

opening, closing and tick prices;

bid and ask prices;

commission rates;

applicable taxes;

high and low prices;

real time and historical company fundamental, market and technical data, both in real time and historically.

15. The method of claim 11, further comprising:

using data interpolation and extrapolations, and adjustments for stock splits and dividends.

16. The method of claim 11, further comprising:

resampling bond, equity and mutual fund data in accordance with at least one investor'"'"'s investment planning horizon.

17. The method of claim 11, further comprising:

regrouping securities for inclusion in an optimal portfolio in accordance with investor-specified criteria.

18. The method of claim 11, further comprising:

generating at least one unique market index based on investor-specified criteria.

19. The method of claim 11, further comprising:

automatically computing asset allocation and managing at least one cash account in real time.

20. The method of claim 11, further comprising:

readjusting portfolio formation in accordance with an investor'"'"'s asset allocation and cash management criteria.

21. The method of claim 11, further comprising:

computing risk/return characteristics for analysis of bonds, stocks and mutual funds.

22. The method of claim 11, further comprising:

providing financial planning worksheets which link to and communicate with at least one of word processing, spreadsheet and database access programs.

23. The method of claim 11, further comprising:

selecting a set of securities from at least one portfolio in order to avoid duplicate portfolios when more than one investor has identical investment criteria.

24. The method of claim 11, further comprising:

dynamically adjusting return-generating functions by stochastic processes, thereby computing the means and the standard deviations of securities returns.

25. The method of claim 11, further comprising:

computing means and standard deviations of a plurality of portfolios and generating an efficient portfolio frontier based upon said computation.

26. The method of claim 11, further comprising:

generating an optimal portfolio by using principles set out in Modern Portfolio Theory and using data comprising bid/ask spreads, commissions and taxes.

27. The method of claim 11, further comprising:

computing an optimal portfolio weight after all transactions costs and taxes have been deducted.

28. The method of claim 11, further comprising:

rebalancing at least one portfolio in real time according to an investor'"'"'s tactical portfolio strategy, including a trading band.

29. The method of claim 11, further comprising:

placing orders in multiples of ten or one hundred shares and placing buy orders after sell orders are placed and executed to ensure that sufficient cash is available in a cash account.

30. The method of claim 11, further comprising:

blocking infinite numbers of continuous automatic trading by introducing a tolerance or precision level within which portfolio weights are optimally re-calculated.

31. The method of claim 11, further comprising:

providing transactional accounting ledgers to an investor through the Internet for tax purposes.

32. The method of claim 11, further comprising:

calculating an optimal scenario portfolio on the Internet at regular fixed intervals.

33. The method of claim 11, further comprising:

automating a basket-order portfolio system trading technique on the Internet.

34. The method of claim 11, further comprising:

monitoring portfolio performance automatically through the Internet to determine whether the portfolio satisfies an investor'"'"'s target return to risk requirement.

35. The method of claim 11, further comprising:

providing a “

Risk Thermostat”

to show changing levels of risk for an existing portfolio in real time.