Problem 45776. Algorithmic Trading - 1 (optimize simple trading strategy)

Created by jmac

Solve Later

{"parts":[{"partUri":"/matlab/document.xml","contentType":"application/vnd.mathworks.matlab.code.document+xml","content":"<?xml version=\"1.0\" encoding=\"UTF-8\"?><w:document xmlns:w=\"http://schemas.openxmlformats.org/wordprocessingml/2006/main\"><w:body><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>This is the first of a series of problems on quant trading. Quant traders seek to optimize investment performance devising trading strategies (i.e. rules) that exploit patterns found in historical market data.</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>Creative solutions, comments and suggestions for improvement of the problem are appreciated! Please respect basic courtesy guidelines: e.g. refrain from using Cody hacks to get a leading score.</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>Goal</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>Trade one single security, based on one single trading signal (observed variable)</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>Use an all or nothing, fractional trading strategy, with no leverage nor short selling - each day invest either 100% of the funds at market open, or leave them all in cash)</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>Maximize the compound annual growth return (CAGR) of your investment, over the test period</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>Check</w:t></w:r><w:r><w:t> </w:t></w:r><w:hyperlink w:docLocation=\"https://en.wikipedia.org/wiki/Compound_annual_growth_rate\"><w:r><w:t>&lt;https://en.wikipedia.org/wiki/Compound_annual_growth_rate</w:t></w:r></w:hyperlink><w:r><w:t>&gt;</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>You are given</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>P</w:t></w:r><w:r><w:t>, a [n x 1] vector of daily prices of the traded security, at market open (always positive)</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>S</w:t></w:r><w:r><w:t>, a [n x 1] vector of trading signals, calculated just ahead of market open (can take any real value)</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>These will serve both as training and test set</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>Your function should return</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>t</w:t></w:r><w:r><w:t>, a scalar threshold that determines this simple trading strategy: invest all the available funds in the security when S&gt;t, stay in cash otherwise</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>Assumptions</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You transact once per day at market open</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You buy and sell the security instantaneously at market open</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You can buy, sell, and hold fractional volumes of the security</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You don't incur in transaction costs, nor do you receive any return on the funds left in cash</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"text\"/><w:jc w:val=\"left\"/></w:pPr><w:r><w:rPr><w:b/></w:rPr><w:t>Hints</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>The array of daily returns can be calculated by</w:t></w:r><w:r><w:t> </w:t></w:r><w:r><w:rPr><w:rFonts w:cs=\"monospace\"/></w:rPr><w:t>R = D.*(S(1:n-1)&gt;t)</w:t></w:r><w:r><w:t>, where D is the day-ahead price change, i.e.</w:t></w:r><w:r><w:t> </w:t></w:r><w:r><w:rPr><w:rFonts w:cs=\"monospace\"/></w:rPr><w:t>D=P(2:n)./P(1:n-1)-1;</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You can assume there are 252 trading days/year, so your goal is to maximize</w:t></w:r><w:r><w:t> </w:t></w:r><w:r><w:rPr><w:rFonts w:cs=\"monospace\"/></w:rPr><w:t>CAGR = prod(1+D.*(S(1:n-1)&gt;t))^(252/n)-1;</w:t></w:r></w:p><w:p><w:pPr><w:pStyle w:val=\"ListParagraph\"/><w:numPr><w:numId w:val=\"1\"/></w:numPr><w:jc w:val=\"left\"/></w:pPr><w:r><w:t>You can find the solution by maximizing the sum of log returns or, more simply, maximizes</w:t></w:r><w:r><w:t> </w:t></w:r><w:r><w:rPr><w:rFonts w:cs=\"monospace\"/></w:rPr><w:t>sum(log(1+D.*(S(1:n-1)&gt;t)));</w:t></w:r></w:p></w:body></w:document>","relationship":null}],"relationships":[{"relationshipType":"http://schemas.mathworks.com/matlab/code/2013/relationships/document","target":"/matlab/document.xml","relationshipId":"rId1"}]}

<div style = "text-align: start; line-height: 20.44px; min-height: 0px; white-space: normal; color: rgb(0, 0, 0); font-family: Menlo, Monaco, Consolas, monospace; font-style: normal; font-size: 14px; font-weight: 400; text-decoration: none solid rgb(0, 0, 0); white-space: normal; "><div style="block-size: 743px; display: block; min-width: 0px; padding-block-start: 0px; padding-top: 0px; perspective-origin: 407px 371.5px; transform-origin: 407px 371.5px; vertical-align: baseline; "><div style="block-size: 42px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 21px; text-align: left; transform-origin: 384px 21px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">This is the first of a series of problems on quant trading. Quant traders seek to optimize investment performance devising trading strategies (i.e. rules) that exploit patterns found in historical market data.</div><div style="block-size: 42px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 21px; text-align: left; transform-origin: 384px 21px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">Creative solutions, comments and suggestions for improvement of the problem are appreciated! Please respect basic courtesy guidelines: e.g. refrain from using Cody hacks to get a leading score.</div><div style="block-size: 21px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 10.5px; text-align: left; transform-origin: 384px 10.5px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">Goal</div><ul style="block-size: 100px; font-family: Helvetica, Arial, sans-serif; list-style-type: square; margin-block-end: 20px; margin-block-start: 10px; margin-bottom: 20px; margin-top: 10px; perspective-origin: 391px 50px; transform-origin: 391px 50px; margin-top: 10px; margin-bottom: 20px; "><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">Trade one single security, based on one single trading signal (observed variable)</li><li style="block-size: 40px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 20px; text-align: left; transform-origin: 363px 20px; white-space: pre-wrap; margin-left: 56px; ">Use an all or nothing, fractional trading strategy, with no leverage nor short selling - each day invest either 100% of the funds at market open, or leave them all in cash)</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">Maximize the compound annual growth return (CAGR) of your investment, over the test period</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">Check <a target='_blank' href = "https://en.wikipedia.org/wiki/Compound_annual_growth_rate">&lt;https://en.wikipedia.org/wiki/Compound_annual_growth_rate</a>&gt;</li></ul><div style="block-size: 21px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 10.5px; text-align: left; transform-origin: 384px 10.5px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">You are given</div><ul style="block-size: 60px; font-family: Helvetica, Arial, sans-serif; list-style-type: square; margin-block-end: 20px; margin-block-start: 10px; margin-bottom: 20px; margin-top: 10px; perspective-origin: 391px 30px; transform-origin: 391px 30px; margin-top: 10px; margin-bottom: 20px; "><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">P, a [n x 1] vector of daily prices of the traded security, at market open (always positive)</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">S, a [n x 1] vector of trading signals, calculated just ahead of market open (can take any real value)</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">These will serve both as training and test set</li></ul><div style="block-size: 21px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 10.5px; text-align: left; transform-origin: 384px 10.5px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">Your function should return</div><ul style="block-size: 40px; font-family: Helvetica, Arial, sans-serif; list-style-type: square; margin-block-end: 20px; margin-block-start: 10px; margin-bottom: 20px; margin-top: 10px; perspective-origin: 391px 20px; transform-origin: 391px 20px; margin-top: 10px; margin-bottom: 20px; "><li style="display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 20px; text-align: left; transform-origin: 363px 20px; white-space: pre-wrap; margin-left: 56px; ">t, a scalar threshold that determines this simple trading strategy: invest all the available funds in the security when S&gt;t, stay in cash otherwise</li></ul><div style="block-size: 21px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 10.5px; text-align: left; transform-origin: 384px 10.5px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">Assumptions</div><ul style="block-size: 80px; font-family: Helvetica, Arial, sans-serif; list-style-type: square; margin-block-end: 20px; margin-block-start: 10px; margin-bottom: 20px; margin-top: 10px; perspective-origin: 391px 40px; transform-origin: 391px 40px; margin-top: 10px; margin-bottom: 20px; "><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">You transact once per day at market open</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">You buy and sell the security instantaneously at market open</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">You can buy, sell, and hold fractional volumes of the security</li><li style="block-size: 20px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 10px; text-align: left; transform-origin: 363px 10px; white-space: pre-wrap; margin-left: 56px; ">You don't incur in transaction costs, nor do you receive any return on the funds left in cash</li></ul><div style="block-size: 21px; font-family: Helvetica, Arial, sans-serif; line-height: 21px; margin-block-end: 9px; margin-block-start: 2px; margin-bottom: 9px; margin-inline-end: 10px; margin-inline-start: 4px; margin-left: 4px; margin-right: 10px; margin-top: 2px; perspective-origin: 384px 10.5px; text-align: left; transform-origin: 384px 10.5px; white-space: pre-wrap; margin-left: 4px; margin-top: 2px; margin-bottom: 9px; margin-right: 10px; "><span style="block-size: auto; display: inline; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-end: 0px; margin-inline-start: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; perspective-origin: 0px 0px; transform-origin: 0px 0px; ">Hints</div><ul style="block-size: 126px; font-family: Helvetica, Arial, sans-serif; list-style-type: square; margin-block-end: 20px; margin-block-start: 10px; margin-bottom: 20px; margin-top: 10px; perspective-origin: 391px 63px; transform-origin: 391px 63px; margin-top: 10px; margin-bottom: 20px; "><li style="block-size: 42px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 21px; text-align: left; transform-origin: 363px 21px; white-space: pre-wrap; margin-left: 56px; ">The array of daily returns can be calculated by R = D.*(S(1:n-1)&gt;t), where D is the day-ahead price change, i.e. D=P(2:n)./P(1:n-1)-1;</li><li style="block-size: 42px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 21px; text-align: left; transform-origin: 363px 21px; white-space: pre-wrap; margin-left: 56px; ">You can assume there are 252 trading days/year, so your goal is to maximize CAGR = prod(1+D.*(S(1:n-1)&gt;t))^(252/n)-1;</li><li style="block-size: 42px; display: list-item; margin-block-end: 0px; margin-block-start: 0px; margin-bottom: 0px; margin-inline-start: 56px; margin-left: 56px; margin-top: 0px; perspective-origin: 363px 21px; text-align: left; transform-origin: 363px 21px; white-space: pre-wrap; margin-left: 56px; ">You can find the solution by maximizing the sum of log returns or, more simply, maximizes sum(log(1+D.*(S(1:n-1)&gt;t)));</li></ul></div></div>

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Alfonso Nieto-Castanon on 23 Aug 2020

please fix testsuite

Tokdemir Ibrahim Kerem on 6 Oct 2020

my solution works well with test cases presented here when I run it on my computer, but it fails when I submit same solution

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Solution 3545440

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T. Dunker on 4 Nov 2020

It seems that test 3 and 4 need some rework. Variables from test 2 are not available.

goc3 on 4 Nov 2020

@T. Dunker: Those test cases have been combined with test case 2 to overcome that scope problem. I re-scored your solution and it passed.

jmac on 22 Nov 2020

Test suite fixed

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Problem 45776. Algorithmic Trading - 1 (optimize simple trading strategy)

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