Optimata

Inspiration

Most online investment tools today only hedge against financial capital risk but fail to account for human capital risk, which is even more significant early on in one’s life.

What it does

Optimata creates an optimally hedged portfolio that takes into account both types of risk.

How we built it

To construct the optimally hedged portfolio we chose 15 different exchange-traded funds, known as ETFs. These ETFs mimic the performance of different industries, as well as, companies of a particular size or potential for growth.

We first calculate the historical returns for an individual’s existing stock portfolio. These returns are then regressed against our 15 chosen ETFs.

The regression gives a beta value for each ETF. The beta represents the sensitivity of the individual’s stock portfolio with the particular ETF. A positive beta value suggests a positive correlation between the two, which means we should sell the ETF. Whereas a negative beta value means we should buy the ETF.

Challenges we ran into

Realizing that correlation did not account for volatility of stocks, and finding an appropriate metric that did. Minimizing transaction costs Dealing with multicollinearity in our regression model.

Accomplishments that we're proud of

Developing a fully functional web application that meaningfully hedges financial risk.

What we learned

How to hedge against financial capital risk embedded in an investor's stock portfolio. Different types of regression models. Principal Component Analysis. Setting up a web application from start to finish.