Sunday, March 20, 2011

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

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.
The main difference respect to the last portfolio composition is the sale of ‘ABT’. The turnover from last month is 10% (due to the portfolio growth in the last month and the sale of that company).
Regarding the performance, over the last year (52 weeks), the strategy attained a volatility of 10% (versus 16% of the S&P 500).

The weekly 95%-VaR was 2.4% (versus 4.2% of the S&P 500).

The last year annualized Sharpe ratio of the low vol strategy was 1.37 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the S&P 500 was 0.71 over the same period.

Using a 52-weeks historical method over the last year, the low-vol portfolio attained a higher return (70% of the time) than that of the S&P 500. Moreover, the volatility of the low-vol portfolio was always less than that of the S&P 500.

I have omitted more details regarding the persistence of these conclusions over a longer history because they are roughly the same as those in the previous posts.

As a summary, the low-volatility strategy dominates the market index (70% of the time over the last year), showing it attains consistently better risk-adjusted returns.


  1. Caution on FDO as it is a buyout target and upside (fundamentally speaking) may be limited but downside (if the buyout fails) may be much larger. Thus future low volatility of the stock may be 'artificially' created and may not accurately reflect the stock itself which can hide greater underlying risk.

    How does your model take into account such buyout targets?

  2. Thanks for the suggestion David.

    I’m afraid at this moment I do not take into account such buyout targets. I need to think carefully about that. Thanks again.