The Robo-Advisor was created and is continually upgraded by Swissquote’s Quantitative Asset Management department (QAM). It uses a powerful tried-and-tested algorithm. Learn how our Robo-Advisor works.
1. Understanding the client’s risk profile
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Based on responses to a series of questions, the Robo-Advisor is able to map out a client’s financial situation and risk aversion against a maximum tolerable level of portfolio risk. This creates an upper limit on the risk level of the client’s portfolio. The portfolio is then constructed with a risk level below this upper limit, potentially by a significant margin, depending on market conditions and the client’s overall strategy.
2. Building an asset-class allocation
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Based on the client’s risk level, the reference currency and the asset classes selected, the Robo-Advisor allocates across asset classes in two steps. Firstly, a dynamic allocation is created to maximize diversification while keeping the volatility of the portfolio at a reasonable level, as per the client’s requirements. This volatility value depends on the risk level, with dependency between asset classes.
Secondly, this process is enhanced by a tactical allocation, whereby the Robo-Advisor will over- or under-weight asset classes to take advantage of current market conditions extrapolated from automatic quantitative macroeconomic analyses. This technique uses machine learning alongside key economic variables. Our Quantitative Asset Management team is continuously working to improve the machine learning and other technologies that underpin our Robo-Advisory services. Our partnership of the Swissquote Chair in Quantitative Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL) gives us access to some of the world’s leading experts in the field.
«Our partnership of the Swissquote Chair in Quantitative Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL) gives us access to some of the world’s leading experts in the field.»
3. Measuring portfolio risk
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The Robo-Advisor estimates a portfolio risk, using the Conditional Value at Risk (CVaR) or Expected Shortfall method. This measures the expected portfolio loss at a given horizon, conditional on experiencing a worst-case scenario. By default, our Robo-Advisor uses a horizon of one week and considers the worst 5% portfolio scenarios to calculate the CVaR.
4. Constructing a portfolio
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«The Robo-Advisor constructs tailor-made portfolios by selecting securities with the highest score.»
The Robo-Advisor constructs tailor-made portfolios by selecting securities with the highest score to ensure the portfolio meets both the client’s risk profile and any other allocation restraints defined by the client. This could include, for example, limits on exposure to certain sectors or the specification of certain percentages of stock holding. The Robo-Advisor assigns scores to each security based on an estimate of its future expected return over a specified time period. These scores are modified based on client preferences and potentially refined views from analysts. Once the parameters have been set, the Robo-Advisor computes the optimal allocation and transactions are then automatically sent to the exchanges.
5. Monitoring and rebalancing the portfolio
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The Robo-Advisor constantly monitors the portfolios, computing the CVaR on a weekly basis and re-allocating the portfolio if necessary.
Periodically, the portfolio is also rebalanced to the new optimal allocation. In addition, a team of professionals constantly monitors both the Robo- Advisor and the portfolios. It is possible at any time to change the Robo-Advisor’s strategy and start the reallocation manually.
6. Optimizing order execution
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The Robo-Advisor automatically sends buy and sell limit orders for liquid assets.
Orders for illiquid assets are manually executed by traders at Swissquote. All transactions are optimised to take advantage of intraday volatility and liquidity. Transaction processing is given by a volume weighted average price.
«All transactions are optimised to take advantage of intraday volatility and liquidity.»
Robo-Advisor: try it now
Open an account and try out our Robo-Advisor now.
Do you want to take a look first? Try a demo and watch the Robo-Advisor work in real conditions.
