paper-portfolio: Portfolio Construction & Performance Evaluation 📈

paper-portfolio is the final component of the P.A.P.E.R (Platform for Asset Pricing Experimentation and Research) monorepo. It provides a powerful, configuration-driven framework for constructing investment portfolios based on the predictive outputs of machine learning models and evaluating their economic significance.

Using the prediction files generated by paper-model, this package allows you to backtest various long-short portfolio strategies, calculate standard performance metrics, and generate insightful reports and visualizations.

---

✨ Features

• Flexible Portfolio Construction:
  • Long-Short Strategies: Easily construct long-short portfolios by sorting assets based on their predicted returns each month.
  • Quantile-Based Selection: Define portfolio legs using specific quantile ranges (e.g., long top 10%, short bottom 10%).
  • Weighting Schemes: Supports both equal (equally-weighted) and value (e.g., market-cap weighted) portfolio construction.
• Comprehensive Performance Evaluation:
  • Standard Metrics: Calculates annualized_sharpe_ratio, expected_shortfall (CVaR), and tracks cumulative_return.
  • Benchmarking: Automatically compares strategies against the risk-free rate and an optional, user-provided market index benchmark.
• In-Depth Analysis:
  • Cross-Sectional Analysis: Optionally generates plots showing the cumulative performance of assets sorted into deciles by prediction. This is crucial for checking if the model's predictions are monotonically related to returns.
• Configuration-Driven Workflow:
  • Define all portfolio strategies, the models to test, benchmarks, and metrics to calculate in a single, human-readable portfolio-config.yaml file. This ensures reproducibility and simplifies experimentation.
• Automated Reporting & Visualization:
  • Generates detailed summary reports in text files for each model-strategy combination.
  • Automatically creates and saves PNG plots of cumulative returns, providing a clear visual comparison of the long, short, and combined portfolios against benchmarks.
  • Saves detailed monthly portfolio returns to Parquet files for deeper, custom analysis.
• Seamless Integration:
  • Directly consumes the .parquet prediction files produced by paper-model.
  • Orchestrated by the paper-asset-pricing CLI for a smooth, end-to-end research pipeline.

---

🚀 Installation

paper-portfolio is designed to be part of the larger PAPER monorepo.

Recommended (as part of paper-asset-pricing):

This method ensures paper-portfolio is available to the main paper CLI orchestrator.

# Using pip
pip install "paper-asset-pricing[portfolio]"

# Using uv
uv pip install "paper-asset-pricing[portfolio]"

Standalone Installation:

If you only need paper-portfolio and its core functionalities for a different project.

# Using pip
pip install paper-portfolio

# Using uv
uv pip install paper-portfolio

From Source (for development within the monorepo):

Navigate to the root of your PAPER monorepo and install paper-portfolio in editable mode.

# Using pip
pip install -e ./paper-portfolio

# Using uv
uv pip install -e ./paper-portfolio

---

📖 Usage Workflow

The paper-portfolio pipeline is the final step in the P.A.P.E.R workflow.

1. Prerequisites: Data and Model Pipelines

Before running the portfolio phase, you must first run the data and model pipelines to generate the necessary inputs.

# Assuming you are in your project directory (e.g., ThesisExample)

# 1. Run the data phase
paper execute data

# 2. Run the models phase
paper execute models

After these steps, your project's models/predictions/ directory should contain files like OLS_model_predictions.parquet.

2. Portfolio Configuration (portfolio-config.yaml)

Create or edit the portfolio-config.yaml file in your project's configs directory. This file defines which models to test and which portfolio strategies to apply.

# MyProjectExample/configs/portfolio-config.yaml

input_data:
  # List of model names whose predictions you want to evaluate.
  # These must match the names from models-config.yaml.
  prediction_model_names:
    - "OLS_model"
    - "GBRT_tuned"

  # The base name of the processed dataset used by the models.
  processed_dataset_name: "processed_panel_data"

  # Column names required for calculations.
  date_column: "date"
  id_column: "permno"
  risk_free_rate_col: "rf"
  value_weight_col: "marketcap" # For value-weighting

# Optional: Define a market index for benchmark comparison.
# The CSV file must be placed in the `portfolios/indexes/` directory.
market_benchmark:
  name: "Market Index"
  file_name: "market_index.csv"
  date_column: "caldt"
  return_column: "vwretd"
  date_format: "%Y%m%d"

# A list of portfolio strategies to backtest for each model.
strategies:
  - name: "Decile_Sort_Equal_Weighted"
    weighting_scheme: "equal"
    long_quantiles: [0.9, 1.0]   # Long the top 10%
    short_quantiles: [0.0, 0.1]  # Short the bottom 10%

  - name: "Decile_Sort_Value_Weighted"
    weighting_scheme: "value"
    long_quantiles: [0.9, 1.0]
    short_quantiles: [0.0, 0.1]

# A list of performance metrics to calculate and report.
metrics:
  - "sharpe_ratio"
  - "expected_shortfall"
  - "cumulative_return"

# Enable the generation of cross-sectional decile return plots.
cross_sectional_analysis: true

3. Running the Portfolio Pipeline

Execute the portfolio phase using the paper-asset-pricing CLI from your project directory.

# Assuming you are in your project directory (e.g., MyProjectExample)
paper execute portfolio

4. Expected Output

Console Output:

The console will show a high-level success message.

>>> Executing Portfolio Phase <<<
Portfolio phase completed successfully. Additional information in 'MyProjectExample/logs.log'

ThesisExample/portfolios/results/ Directory:

The results directory will be populated with detailed reports and plots for each model-strategy combination.

├── cross_sectional_analysis/
│   ├── GBRT_tuned_cross_sectional_returns.png
│   └── OLS_model_cross_sectional_returns.png
├── GBRT_tuned_Decile_Sort_Equal_Weighted_cumulative_return.png
├── GBRT_tuned_Decile_Sort_Equal_Weighted_monthly_returns.parquet
├── GBRT_tuned_Decile_Sort_Equal_Weighted_report.txt
├── GBRT_tuned_Decile_Sort_Value_Weighted_cumulative_return.png
├── ... (and so on for all models and strategies)

Example Report (OLS_model_Decile_Sort_Value_Weighted_report.txt):

--- Portfolio Performance Report ---
Model: OLS_model
Strategy: Decile_Sort_Value_Weighted
------------------------------
sharpe_ratio: 1.2543
expected_shortfall: -0.0312
final_cumulative_return: 8.1234
------------------------------

---

⚙️ Configuration Reference

The portfolio-config.yaml file controls the entire portfolio evaluation process.

input_data

• prediction_model_names (list, required): A list of model names. The manager will look for prediction files named {model_name}_predictions.parquet.
• processed_dataset_name (string, required): The base name of the processed dataset used for modeling. This is needed to fetch columns like the risk-free rate and value-weighting characteristic.
• date_column, id_column, risk_free_rate_col, value_weight_col (string, optional): Names of key columns.

market_benchmark (optional)

• name (string, required): Display name for the benchmark.
• file_name (string, required): The name of the CSV file in the portfolios/indexes/ directory.
• date_column, return_column, date_format (string, required): Column names and date format for the benchmark file.

strategies

A list of portfolio strategies to backtest. Each strategy requires:

• name (string, required): A unique name for the strategy (e.g., "Value_Weighted_Decile").
• weighting_scheme (string, required): Must be either "equal" or "value".
• long_quantiles (list of two floats, required): The lower and upper quantile boundaries for the long leg (e.g., [0.9, 1.0] for the top 10%).
• short_quantiles (list of two floats, required): The lower and upper quantile boundaries for the short leg (e.g., [0.0, 0.1] for the bottom 10%).

metrics

A list of performance metrics to compute. Supported values: "sharpe_ratio", "expected_shortfall", "cumulative_return".

cross_sectional_analysis (optional)

• Set to true to enable the generation of decile-sorted performance plots for each model. Defaults to false.

---

🤝 Contributing

Contributions to paper-portfolio are highly welcome! If you have ideas for new performance metrics, portfolio construction techniques, or reporting features, please feel free to open an issue or submit a pull request.

---

📄 License

paper-portfolio is distributed under the MIT License. See the LICENSE file for more information.

---