INTRODUCTION TO DIVERSI

EFFICIENT PORTFOLIO DIVERSIFIER

for

MUTUAL FUNDS







DIVERSI Version 1.0
Copyright 1988 Thomas E. Duce





















Thomas E. Duce
425 Richards Avenue
Melbourne Beach, Florida 32951













INTRODUCTION TO DIVERSI


Introduction

DIVERSI is an investment diversification program for use as an
aid in maximizing the total return and minimizing the risk of
a portfolio of mutual funds. The program is based on the
Markowitz model, and employs the concept that portfolio risk
can be reduced through diversification.

DIVERSI uses statistical analysis of historical performance
data, and estimates the efficient frontier and efficient
portfolios, including portfolio performance, for up to nine
user selected candidate mutual funds and one risk free securi-
ty.

The efficient frontier is the graph of total return versus
risk for all efficient portfolios that can be selected from a
candidate group of securities. The graph is a curved line
which starts at the portfolio of minimum risk and return and
extends upward, curving to the right, to the portfolio of
maximum return. There can be no portfolio above the curve,
and any portfolio below the curve is less efficient than one
on the curve.

An efficient portfolio corresponds to a point on the efficient
frontier, and is a mix of mutual funds which, based on past
performance, has the least risk for a particular total return,
or the greatest total return for a given risk.

DIVERSI requires data files of 37 months of performance data
(monthly share values and dividends) for the mutual funds.
Data files are initially created from keyboard input data, and
are maintained by keying in monthly update data. The Compu-
Serve MQData data base is a good data source. The program
provides flexible data management capability for additions and
deletions of funds, corrections, updates, and other functions.
The only input required for the optional risk free security is
the annual rate of return, keyed in at the time the option is
selected.

The monthly total return of a mutual fund is the net change in
value over the month plus dividends. DIVERSI estimates the
fund statistics - expected (average) monthly total return and
risk for each fund. It also estimates the coefficient of
correlation (of monthly total return) for each fund pair; this
is the key to reducing risk through diversification - lower
correlations lead to lower portfolio risk. Keyboard input of
statistics is an optional alternative to the use of historical
data.

The program then estimates the efficient frontier, and effi-
cient portfolio(s) satisfying the user's desired return(s).


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One of the most useful features of DIVERSI is the capability
to include a risk free security in a portfolio. There is a
point on most efficient frontier graphs below which a given
return can be obtained at lower risk by including a risk free
security in the portfolio. DIVERSI provides the option of
identifying that point and estimating portfolios both with and
without a risk free security.

DIVERSI is a tool for investors, not traders, who want to
maximize return and minimize risk. It does not make deci-
sions; the user makes the decisions and is solely responsible
for them. Please read the USER'S GUIDE for a more complete
understanding of the program.


System Requirements

The program requires an IBM PC or PC compatible computer with
640K bytes of memory, a minimum disk capability of two 5 1/4"
floppy drives, and the MS-DOS/PC-DOS operating system (version
2 or later). The display monitor may be color or monochrome.
CGA graphics capability will permit graphic display of the
efficient frontier, but is not required. A printer is re-
quired if you want hard copy of the DIVERSI reports. You will
need a communication modem for downloading CompuServe data.


The RISKRETN Program

RISKRETN is a supporting program which calculates the risk and
return of a given portfolio, either real or hypothetical.
That is, if you have a specific portfolio, or are considering
one, RISKRETN will tell you the estimated risk and return
after you give it the necessary information.

RISKRETN can be used to -

- Look at the present performance of a DIVERSI portfolio
estimated earlier, say three to six months ago.

- Look at the expected performance of a contemplated portfo-
lio where the selection was influenced by a DIVERSI esti-
mate, but which differs from the DIVERSI portfolio.

- Look at the performance of any portfolio for which the
required statistics are available.

- Compare the performance of an actual portfolio with a
"today" DIVERSI estimate based on the same list of securi-
ties. How far short does the performance of the actual
portfolio fall from that of today's estimated efficient
portfolio?




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RISKRETN is not included in the DIVERSI shareware package; it
is not essential to the use of DIVERSI, although it can be
very useful when the programs are used together.

The user inputs required for each security include name, value
of the investment, annual expected total return, and risk.
The program also requires the coefficient of correlation (of
periodic total return) for each security pair. DIVERSI is the
best source of the statistics, to insure internal consistency
of the information. However, other sources may be used,
taking care to insure consistency.


DIVERSI User's Guide

Please consult the User's Guide (contained in DIVERSUG.ARC)
for a more detailed description of DIVERSI and RISKRETN.


The DIVERSI Shareware Package

The DIVERSI shareware package includes the following files:

File Size Contains Size Title
DIVERS.DOC 12K DIVERSI.DOC 12K Introduction to
DIVERSI
DIVUG.ARC 24K DIVERSUG.DOC 69K User's Guide
DIVERS.ARC 107K DIVERSI.EXE 152K DIVERSI program
PRACTICE.068 6K PRACTICE data file


User Registration

The shareware user registration fee is $45.00, payable by
check or money order to -

Thomas E. Duce
425 Richards Avenue
Melbourne Beach, Florida 32951

The new registrant will receive a printed copy of the User's

Guide and a 5 1/4" disk (360K DSDD) containing the current
version of DIVERSI, the RISKRETN supporting program, and
PRACTICE data files. Support available to the registered user
includes -

- Free telephone consultation.

- Program support, including notification of program version
changes and copies by mail at reasonable cost.






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Conclusion

DIVERSI applies the generally accepted concept that portfolio
risk can be reduced through diversification, and estimates the
efficient frontier as well as the makeup and performance of
efficient portfolios based on past performance of the mutual
funds under consideration.

The program, in effect, provides a measure of the degree to
which effective diversification is accomplished when funds of
differing performance characteristics are combined into a
portfolio; thus, it is an aid in the selection of funds as
well as in deciding how much of each fund to include in your
portfolio.

The quality of a DIVERSI portfolio depends on your selection
of candidate mutual funds as well as on the program. The
program works only with what you give it; you should exercise
the same good judgment in selecting candidate mutual funds as
you would without DIVERSI.

DIVERSI is an investment decision aid which can help you to
improve future portfolio performance; however, it does not
forecast the future and it does not make decisions. You make
the decisions.































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