Saturday, February 19, 2011

US weekly portfolio recommendation (from 21 to 25, Feb 2011)

Please, see my first post
for more details regarding the portfolio strategy.

The low volatility portfolio recommended for this week is (ticker notation):

    'MO'    'AMGN'    'BCR'    'BDX'    'CVS'    'CPB'    'ED'    'FDO'
    'GIS'    'HRL'    'JNJ'    'K'    'KMB'    'LH'    'MKC'    'MCD'
    'PEP'    'PG'    'RAI'    'SO'    'WEC'

Although I recommend a portfolio composition every week, it is desirable to maintain this composition for four weeks, and then rebalance with the new composition.

This portfolio consists of 21 stocks. Four weeks ago, the portfolio composition was the same except: now we have added ‘CPB’ and ‘LH’, and now we no longer have ‘CLX’. In order to have again equal weights for all the stocks, the turnover respect to previous composition is 19% (mainly due to the change of 3 stocks in the portfolio composition and to the portfolio growth in the last month).
Regarding the performance, over the last year (52 weeks), the strategy attained a volatility of 10% (versus 17% of the S&P 500).
The weekly 95%-VaR was 2.4% (versus 4.2% of the S&P 500). See this post for the details about the back-testing.

The last year annualized Sharpe ratio of the low vol strategy was 1.91 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the S&P 500 was 1.40 over the same period.

Finally, the correlation of the low vol strategy with the S&P 500 along the last 52 weeks was 85%.

All these performance results are consistent over time. I have omitted the evolution of the performance measures over a long history because they are roughly the same as those in the previous posts.

As a summary, the back-testing results confirm again that low volatility portfolios continue to have low volatility in the future, and furthermore, they attain better returns (per unit of risk) than those of market indexes like the S&P 500.

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