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Blending AI Stock Picking and Conventional Portfolio Optimization

August 31, 2023 • Posted in Equity Premium, Investing Expertise

Should investors trust artificial intelligence (AI) models such as ChatGPT to pick stocks? In their August 2023 paper entitled “ChatGPT-based Investment Portfolio Selection”, Oleksandr Romanko, Akhilesh Narayan and Roy Kwon explore use of ChatGPT to recommend 15, 30 or 45 S&P 500 stocks, with portfolio weights, based on textual sentiment as available to Chat GPT via web content up to September 2021. For robustness, they ask ChatGPT to repeat recommendations for each portfolios 30 times and select the 15, 30 or 45 most frequently recommended stocks for respective portfolios. They then test out-of-sample performance of the following five implementations of each portfolio during September 2021 to July 2023, mid-March 2023 to July 2023, and May 2023 to July 2023:

  1. ChatGPT picks and ChatGPT weights.
  2. ChatGPT picks weighted equally.
  3. ChatGPT picks weighted based on minimum variance (Min Var) weights from a 5-year rolling weekly history.
  4. ChatGPT picks weighted based on maximum return (Max Ret) weights from a 5-year rolling weekly history.
  5. ChatGPT picks weighted based on maximum Sharpe ratio (Max Sharpe) weights from a 5-year rolling weekly history.

For benchmarking, they consider:

  • Long-only portfolios that incorporate all possible combinations of 15, 30 or 45 S&P 500 stocks weighted as above for Min Var, Vax Ret or Max Sharpe.
  • The S&P 500 Index, Dow Jones Industrial Average and the NASDAQ Index.
  • Average performance of 13 popular equity funds.

Using weekly data as specified up to September 2021 for training and subsequent weekly data through June 2023 for out-of-sample testing, they find that:

(more…)

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