Sunday, April 10, 2011

Spain weekly portfolio recommendation (from 11 to 15, April 2011)

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

   'ACS'    'EBRO'    'ENG'    'IDR'    'ITX'    'REE'   'TEF'
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.
There is no difference respect to the last-month portfolio composition. The turnover from last month is 2.5% (due to the portfolio growth).
Regarding the performance, over the last year (52 weeks), the strategy attained a volatility of 18% (versus 28% of the IBEX35).

The weekly 95%-VaR was 4.0% (versus 5.2% of the IBEX35).

The last year annualized Sharpe ratio of the low-vol strategy was 0.60 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the IBEX35 was 0.09 over the same period.

The next graph shows the risk-return space for the two considered portfolios.

The red point represents the mean return and volatility of the low-vol portfolio over the past 52 weeks. On the other hand, the blue point represents the mean return and volatility of the IBEX35 index over the same 52 past weeks.

We can see the low-vol portfolio has a mean return better than that of the IBEX35 together with a better volatility. In this case, we say the low-vol portfolio dominates the index.

I have computed the same risk-return space for every week over the last year, using the same 52-weeks historical method to estimate the mean returns and the volatilities. The low-vol portfolio attained always a higher return than that of the IBEX35. Moreover, the volatility of the low-vol portfolio was always less than that of the IBEX35.

As a summary, the low-volatility strategy dominates the market index most of the time, showing it attains consistently better risk-adjusted returns.

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