Sunday, April 1, 2012

US portfolio recommendation (from 2, April 2012)

The portfolio recommendation is based on two low-volatility strategies: a long-only minimum-variance portfolio and a “130:30” minimum-variance portfolio, which is long 130% and short 30%.

These strategies use advanced Optimization and Statistics techniques to hedge against the estimation risk of the associated models. As a result, they attain consistently better risk-adjusted returns than market indexes, as these portfolio recommendations show.

For more details about the implementation of these strategies, please read the following post: Some efficient low-volatility portfolios: the minimum-variance policy

The long-only and the 130:30 low-volatility portfolios recommended for this week, with their corresponding weights, can be found in this file: US_weights_20120402.csv

Although I recommend a portfolio composition every month, it is desirable to maintain this composition for a quarter year, and then rebalance with the new composition.
The current long-only portfolio composition has not changed respect to the previous quarter. The turnover is 13% (due to the portfolio growth). On the other hand, the turnover of the current 130:30 portfolio is a bit larger: 29%.
Regarding the performance, over the last year (52 weeks), the long-only strategy attained a volatility of 11.1% (versus 21.2% of the S&P 500). The volatility of the 130:30 strategy is even better: 9.6%.

The weekly 95%-VaR of the long-only portfolio was 2.1% (versus 4.7% of the S&P 500). The corresponding VaR for the 130:30 portfolio was 1.8%.

The last year annualized Sharpe ratio of the long-only strategy was 1.17 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the 130:30 strategy was 1.60. Finally, the SR of the S&P 500 was 0.43 over the same period.

In the next figure, you can see the compounded return over the last 52 weeks of the three considered portfolios.

 Both low-volatility portfolios attain better returns than those of the S&P 500.

But let add information about the risk. The next graph shows the risk-return space for the three considered portfolios.

The red point represents the mean return and volatility of the long-only portfolio over the past 52 weeks. On the other hand, the green point represents the 130:30 portfolio, and finally the blue point represents the S&P 500 index over the same 52 past weeks.

We can see the two low-volatility portfolios have better mean returns than that of the S&P 500, and also their volatilities are better. In this case, we say the low-vol portfolios dominate 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 long-only and 130:30 portfolios attained a higher return than that of the S&P 500 (100% and 96% of the time, respectively). Moreover, the volatility of both low-vol portfolios was always less than that of the S&P 500.

As a summary, the low-volatility strategies dominate the market index most of the time, showing they attain consistently better risk-adjusted returns.


  1. This portfolio is really safe,always doing a good job for their portfolio and we can see how manage and careful to their portfolio.

  2. Javier: please, which tools do you use to build those low vol portfolios? I would be interested in knowing more about your exact methodology to build myself, maybe using ETFs.

    1. I compute the minimum-variance portfolio using the Ledoit-Wolf estimator for the covariance matrix. See my previous posts. In particular, I use weekly data from the last 3 years to compute that matrix.