Sunday, April 3, 2011

US weekly portfolio recommendation (from 4 to 8, April 2011)

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

    'MO'    'AMGN'    'BCR'    'BDX'    'CVS'    'CPB'    'CLX'    '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-month portfolio composition is the purchase of ‘CLX’. The turnover from last month is 9% (due to the portfolio growth and the purchase of that company).
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).

The last year annualized Sharpe ratio of the low-vol strategy was 1.40 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the S&P 500 was 0.86 over the same period.

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

Each blue point represents the mean return and volatility of the low-vol portfolio over the past 52 weeks. On the other hand, each red point represents the mean return and volatility of the S&P 500 index over the same 52 past weeks.

We can see the low-vol portfolio has a mean return very similar to that of the S&P 500, but its volatility is much better.

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 a higher return (60% 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.

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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