📊The Role of ChatGPT in Portfolio Management

A Case Study from Hyungjin Koa and Jaewook Leea from Department of Industrial Engineering of Seoul National University (commented)

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  • The Role of ChatGPT to Investment Portfolio Management

    • ChatGPT and Portfolio Management

    • ChatGPT as a Tool for Diversification

    • ChatGPT as an Assistant for Portfolio Managers

    • ChatGPT as an Educational Resource

    • Limitations and Future Research

• Bottom Line

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The Role of ChatGPT to Investment Portfolio Management

On March/23 Hyungjin Koa and Jaewook Leea from Department of Industrial Engineering of Seoul National University made a study about the ole of ChatGPT to Investment Portfolio Management.

Here are the takeaways of this study.

ChatGPT and Portfolio Management

The study focuses on the potential of ChatGPT as an assistant for portfolio managers in terms of asset allocation and diversification effect.

The authors use ChatGPT to select asset classes and evaluate the diversification effect of its selections.

The results suggest that ChatGPT’s selections are statistically significantly better in terms of diversity index than randomly selected assets.

Portfolios constructed based on ChatGPT’s selections outperform portfolios built on randomly selected assets.

• Our comment

  • This is an improvement. You may think that beat the randomness is easy but It’s not.

  • We’ve seen previous studies were choosing randomly selected assets outperformed the Market, but there was some extra rules like trailing stops.

ChatGPT as a Tool for Diversification

The authors find that ChatGPT’s asset selection reflects an asset allocation philosophy emphasizing diversification.

ChatGPT’s selections display a statistically significant improvement in diversity index compared to randomly selected assets.

The analysis of portfolio performance indicates that portfolios constructed using ChatGPT’s selections outperform those constructed using randomly selected assets.

• Our comment

  • Diversification became a increasing challenge in an “robotic” market that we live.

  • Historical diversification has now less weight on our analysis. Despite the results outperformed the randomly selected assets, we understand that in the future market will be more ON and OFF most of the time, so in the long-term use ChatGPT as a tool for diversification or adapt or tend to lose power.

ChatGPT as an Assistant for Portfolio Managers

The study contributes to a better understanding of the role of LLMs like ChatGPT as potential assistants for portfolio managers.

The authors suggest that ChatGPT can be a helpful assistant in the investment process, providing plausible and credible explanations for a given set of asset classes.

While ChatGPT cannot predict the future or optimize portfolios to the same extent as human portfolio managers, it does offer a convenient and practical option for individuals lacking knowledge or proficiency in portfolio management.

• Our comment

  • I use ChatGPT every day as an assistant, It can eliminate hours of research, sort millions of data points, and it can do something that no other search engine has been able to do before: collect information and form coherent opinions on topics that require differentiated thinking.

  • For me, ChatGPTreduced research time. Instead of scouring a database "by eye", I can simply ask the app to find a specific number for me in an instant.

ChatGPT as an Educational Resource

ChatGPT can also be employed as an educational resource for inexperienced investors or individuals who lack knowledge of financial matters.

ChatGPT can impart fundamental financial concepts in a comprehensible and user-friendly manner, providing valuable guidance and supportive education in the field of finance.

• Our comment

  • Totally agree, ChatGPT can overtake sites like Investopedia because can answer the specific questions of individual investors.

  • With Google, investors often need to sort through information to find the "right" answer, ignoring search results that are designed by marketing professionals to appear on the first page. ChatGPT does all this for us.

Limitations and Future Research

The study does have limitations, particularly in terms of short-term validation.

The authors recommend further investigation into the potential for ChatGPT to improve asset pricing determinism and the long-term validation of its use in portfolio management.

It is important to note that the role of human experts in portfolio management remains crucial, as they must work in tandem with theoretical frameworks and investment theory to ensure proficiency and reliability in verifying accurate information from LLM.

• Our comment

  • It’s a short-term horizon yet, but the potential is great once the market will take more “robotic” decisions, no one better than a robot to understand this behavior

In what time of the Market Cycle are we now?

It depends on what market. Bonds? Stocks?

Every business day we update the evolution of the Alfa Hedge Portfolio II.

Premium Subscribers have full access to our Alfa Hedge Portfolio II in a Real-Life Brokerage Account in Real Time.

Bottom Line

Reading the study made me think if the ChatGPT will do my job as a portfolio manager.

It depends, if the human let all the control of the market to the robots in the future, I think YES.

But if the humans keep taking part of the decisions DON’T.

What moves the market are the human emotions, as fear and greed, and in this case, my job will be (as now) help investors to identify this Cycles (of course, using ChatGPT).

Read the full study from Hyungjin Koa and Jaewook Leea here.

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