Inputs Generator
The Inputs Generator allows us to create inputs for the Optimizer portion of the software.
We will build the inputs file (.inp) needed to run the optimization. The inputs that we
will be using will be ones that are determined using historical information or ones in
which the user gives expectations for the necessary inputs.
1. If you go directly from the EnCorr Analyzer to the Inputs Generator by selecting
the Create Inputs icon in the Analyzer and you created any portfolios in the
Analyzer, you will be immediately asked if the portfolios created should be
treated as asset classes. Select no for this option. If you have not gone directly
from the Analyzer software, you must File/Open and change the file extension to
.fld to open your series and portfolios from the Analyzer software.
2. From this point, both ways to enter the software lead you to the same spot. Click
on the Case Info tab and the Startup tab. You can input a description of the input
file you are creating at this point or can do so later. You also need to save the
input file you are creating and can do so now (even though you have not
generated inputs yet, you will at least have a name for the file and can later save
to this name). Click File/Save As and name your new input file (*.inp). Next
click on the Select Series tab and you should Available Series with all the possible
series in the software databases and also Selected Series which will list all of the
individual series you used and the portfolios you built with the Analyzer software.
If you want, you can create new portfolios at this time from any series selected by
clicking on New… /Portfolio…
3. Click on the Options tab and Input Options subtab to determine how your inputs
will be created. Your expected returns can be calculated using AM or GM (the
appropriateness of this option will be discussed in class). The Frequency pull
down next to GM/AM option tells you the frequency of the returns used to find
the AM/GM. A monthly frequency is often most appropriate as it increases the
accuracy of the calculations (over long time periods semi-annual or annual
frequencies may be appropriate). The reasoning behind this selection will also be
discussed in class. The Holding Period option determines which frequency your
data will be reported in. As most individuals are familiar with returns given in
annual terms, this often will be the holding period selected. You also need to
select the time period over which you want the historical data calculated. (Note:
This time period does not have to directly correspond with the time period other
calculations are over. For instance, if I ask you to look at historical returns over
the last 10 years and discuss them, you can still decide that you want you inputs
calculated from 1926 to a certain end date – the logic of why different time
periods may be more or less appropriate will be discussed in class.)
4.
Click on the Inputs Summary tab and Summary subtab to get an overview of
your inputs. You will see Expected Returns, Standard Deviations, and
Correlations for and between all data series and portfolios. Expected returns,
standard deviations, and correlations are calculated based on the options you
selected in Input Options (see #3). All the inputs generated use historical data.
These inputs are fine and you may feel that using historical data over the time
period you selected is the most appropriate way in which to generate inputs for
the optimization process. If this is true, you should save the inputs file and will be
ready to move on to the Optimization software. You do have an additional option
if you feel that you would like some input on the information to be used in the
Optimization process. For instance, if you feel that the Expected Returns
generated using historical data for the Small Stock series is not appropriate, in
your opinion, for future returns, you may make adjustments to the inputs
generated. You can go in and change the expected returns to be used in the inputs
by typing over the generated expected returns. If you do this, you may want to
make notes for each data series (using Data Notes) that describes how each input
was changed. For instance, you may decide that the expected returns for a
specific series is low and may want to add 3% to the return. Note this under Data
Notes so you can refer to the changes later. (Note: You can also make changes to
the expectations in the Optimization portion and may decide that doing so there is
a better option. If you decide to do so when using the Optimization software, you
can include different scenarios – ie, some using the historical inputs, some using
user-defined inputs- and then view the different situations using the various inputs
together for comparison purposes.)
5.
After the inputs appear as you would like (either using the historical data
generation or by making changes yourself), you need to save the inputs file with a
.inp extension. At this point you are ready to use the Optimization process.