Saturday, March 5, 2011

US weekly portfolio recommendation (from 7 to 11, March 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.
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 2.5% (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 1.68 (after proportional transaction costs of 40 bps was discounted). On the other hand, the SR of the S&P 500 was 1.15 over the same period.

Finally, the correlation of the low vol strategy with the S&P 500 along the last 52 weeks was 84%.

Again, all these performance results are consistent over time.

This time, I am going to show you the excess return of the low vol portfolio (after transaction costs) respect to the S&P 500. The evolution is from 2006 up to now.

It can be observed that around 62% of the time, the low vol portfolio return is higher than that of the S&P 500. In contrast, the volatility of the low vol portfolio is always less than that of the S&P 500.

These results can be attained because the low vol portfolio does not present a large correlation with the market index. In the next graph, we show the evolution of the annualized tracking error (respect to the S&P 500) from 2006 up to now.

It can be observed that the mean tracking error is around 12%, relatively high. This allows for better expected returns.

As a summary, the low vol portfolio dominates the market index around 60% of the time in the risk-return space, showing they attain consistently better risk-adjusted returns.

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