Spain weekly portfolio recommendation (from 7 to 11, March 2011)

Please, see my first post

http://estimationrisk.blogspot.com/2011/02/why-low-risk-strategies-can-achieve.html

for more details regarding the portfolio strategy.

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.

Regarding the performance, over the last year (52 weeks), the strategy attained a volatility of 17% (versus 28% of the IBEX 35).
The weekly 95%-VaR was 3.9% (versus 5.2% of the IBEX 35).

See this post for the details about the back-testing.

The last year annualized Sharpe ratio of the low vol strategy was 0.62 (after proportional transaction costs of 40 bps was discounted). On the other hand, the SR of the IBEX 35 was 0.20 over the same period.

Finally, the correlation of the low vol strategy with the IBEX 35 along the last 52 weeks was 91%.

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 IBEX 35. The evolution is from 2009 up to now.

It can be observed that more than 80% of the time, the low vol portfolio return is higher than that of the IBEX 35. In contrast, the volatility of the low vol portfolio is always less than that of the IBEX 35.

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 IBEX 35) from 2009 up to now.

It can be observed that the mean tracking error is around 15%, relatively high. This allows for better expected returns.

As a summary, the low vol portfolio dominates the market index more than 80% of the time in the risk-return space, showing they attain consistently better risk-adjusted returns.