PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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Kevin_in_GA 4,599 posts msg #92482 - Ignore Kevin_in_GA	5/11/2010 6:23:24 PM "good morning kevin, the software needs a 'rule' for how to deal with ties. you have tapped into this --- if 2 ETF's have the same ranked score, the software will default to the ReturnA as the tiebreaker -- so the code actually reads differently if you are 50% 3-month 50% 20-day vs 50% 20-day 50% 3-month. the issue with ties is a bit of a quirk when only using 3 ETF's like this -- especially when 1 is cash. there will be a lot of ties sometimes. our new portfolio app is really a better version of that because as you add more ETF's, you get less ties. this app will be out pretty soon and then you will get fuller appreciation of this issue you have tapped into. if you would like to see the difference, type 51% into ReturnB rather than 50% and 49% for ReturnA. The first choice is to go with the larger % Return period -- but if they are even, as they are with 50/50 -- then it will always default to ReturnA. These are issues that have to be assigned rules -- and we think these rules are logical -- albeit may lead to some very marginal choices of one vs the other." Good to know - clearly the default to the longer timeframe makes a big difference in total returns. Important to know as this concept is refined.
cwn6161 40 posts msg #92490 - Ignore cwn6161	5/11/2010 10:22:40 PM how does this affect the filter or our picks, in terms of the code?
jeremytimko 4 posts msg #92510 - Ignore jeremytimko	5/12/2010 1:10:04 PM I think the simple screen presented on page 1 is a fantastic filter. I have been running tests with it since I discovered this thread Sunday night. The only issue I have is one of using past results to predict future behavior. Specifically, I'm referring to the usage of EEM in the screen. Yes, this has been a wonderfully performing ETF over (roughly) the past 5 years, but 5 years ago, would you have known to include that ETF in your screen? Basically what I'm saying is, how do we know what the 'current' EEM is? Emerging markets may underperform in the coming years...though now that I think about it, this filter will take that into account. Anyway, I have been trying out the screen with a ton of different ETF combinations and finally came to the conclusion that the best way this would work (for me) is to limit the usage to US market ETF's. So, I'm running it using SPY, QQQQ, IWM, DIA, MDY and IWC. Using those along with IEI instead of SHY, a quarterly rebalanced backtest I just ran revealed a 100.03% return since the start of 2007compared to a loss of 17.49% for SPY. Also interesting are the choices used for "cash" equivalent, as a lot of treasury ETF's have a low volatility and hold up quite well in adverse market conditions. IMO, this is by far the best thread on SF. Thanks.
Kevin_in_GA 4,599 posts msg #92517 - Ignore Kevin_in_GA	5/12/2010 3:33:19 PM I think the simple screen presented on page 1 is a fantastic filter. I have been running tests with it since I discovered this thread Sunday night. The only issue I have is one of using past results to predict future behavior. Specifically, I'm referring to the usage of EEM in the screen. Yes, this has been a wonderfully performing ETF over (roughly) the past 5 years, but 5 years ago, would you have known to include that ETF in your screen? Basically what I'm saying is, how do we know what the 'current' EEM is? Emerging markets may underperform in the coming years...though now that I think about it, this filter will take that into account. Anyway, I have been trying out the screen with a ton of different ETF combinations and finally came to the conclusion that the best way this would work (for me) is to limit the usage to US market ETF's. So, I'm running it using SPY, QQQQ, IWM, DIA, MDY and IWC. Using those along with IEI instead of SHY, a quarterly rebalanced backtest I just ran revealed a 100.03% return since the start of 2007compared to a loss of 17.49% for SPY. Also interesting are the choices used for "cash" equivalent, as a lot of treasury ETF's have a low volatility and hold up quite well in adverse market conditions. IMO, this is by far the best thread on SF. Thanks. +++++++++++++++++++++++ 1. I agree that the simple filter works better than the more complex one I wrote in the first post, but it also does not give you any sense of the volatility or risk measure of the ETFs under consideration. I posted a more comprehensive version which also showed you the 21 and 63 day Sharpe ratios, volatility, and alpha for each time frame. I currently use that one since it gives me the same selections but lots of added information on risk and return. 2. As for the use of EEM, remember that in this instance it is really meant to be a proxy for emerging markets, IWM is the proxy for small caps, and SHY is the proxy for cash. I think that in this way the general trend of the market becomes very clear - if a specific sector or market is gaining strength, it is easily seen. EEM, VWO, EFA or any of the other ETFs that represent international/emerging would be fine (your yield may not be as high but the overall ranking should be the same). 3. I just finished backtesting this idea on IWM, EEM, and SHY back through mid-2003. Quarterly rebalancing provides a 314% return versus monthly rebalancing at 245% (this is through 3/31/2010, the last full quarter). Since then, both systems have had you in IWM, so the returns listed here are proportionally the same today. 4. If Emerging Markets underperform over the next few years, this filter will not have you invested in them. Same for if the market takes off - you will be in either EEM or IWM, not SHY. Kevin
davesaint86 726 posts msg #92533 - Ignore davesaint86	5/12/2010 8:49:18 PM Kevin - I agree with Jeremy. Great filter. I'm really pumped about it. I selected EEM, IWM, GLD, SHY as my picks. GLD was at the top this. I want to add a bond or two that historically gains more than cash. AGG has a pretty good long-term record of returns - 5.8%. I've decided I'm going to use this strategy for my IRA, my 401k and my wife's 401k and use nothing else. I've deleted my other SF filters. You stated that you test back to the middle of 2003. Weren't you numbers better before? Did you change the weights? Dave
Kevin_in_GA 4,599 posts msg #92535 - Ignore Kevin_in_GA	5/12/2010 9:40:20 PM On page 2 of this thread I posted my manual backtesting of the filter since Jan 2007 (return of 113% with monthly rebalancing). I downloaded the historical data for IWM, EEM, SPY, and SHY (EEM data only goes back to mid 2003, so that's when I started). Since July 2003 the returns were as I posted earlier. The ETFReplay results are done a little differently, as they are based on RANK rather than absolute score. Also, I am more comfortable with my manual backtesting since I know that I did it myself, and I stuck to the simple rule of switching to the top rated ETF even if the 1st and 2nd place scores were very close. I'll look at rank-based backtesting as well (if it works better, then why not use it?). If you use the expanded filter I wrote (on page 5 of this thread), you can very easily see how each ETF has done over the two timeframes, including Sharpe ratios and excess return versus the SPY. ETFReplay is about to unveil its expanded version of this backtester, which will also be linked to personal portfolios you can set up on their site. Should be VERY cool.
guymar 113 posts msg #92615 - Ignore guymar modified	5/13/2010 4:11:12 PM People, please be prudent, the intra-period drawdowns are big. I am convinced no-one has the stomach to see these trades through when trading with real money ....
Kevin_in_GA 4,599 posts msg #92616 - Ignore Kevin_in_GA	5/13/2010 4:19:29 PM Not really true (assuming you are posting this comment in the right thread?). As I indicated in an earlier post in this thread, I have one of my two 401k accounts entirely in smallcaps right now based on this filter. Show me an easier investment management strategy that delivers similar returns over the past 7 years and I'll consider it. Otherwise, I'll stick with this for the time being.
dmstcp 2 posts msg #92617 - Ignore dmstcp	5/13/2010 4:34:00 PM Hey Kevin, I have been following your posts for a few months now, and I'm ready to try a filter in this thread. In reading your post, I'm looking for the bottom line, I have 2 questions. What filter are you currently using, and how often do you "rinse, wash, repeat." Thanks for your reply, from a SF rookie.
Kevin_in_GA 4,599 posts msg #92737 - Ignore Kevin_in_GA modified	5/14/2010 4:29:44 PM Well, I just finished backtesting a number of different combinations of relative strength and rebalancing time frames from 6/30/2003 until 4/30/2010 (82 months, or 27 quarters). Here's what I got: Using 100% weighting on the 21 day relative strength: Monthly rebalancing: 129% return Quarterly rebalancing: 180% return Using a 50/50 weighting between the 21 day and 63 day relative strengths: Monthly rebalancing: 264% return Quarterly rebalancing: 337% return Using 100% weighting on the 63 day relative strength: Monthly rebalancing: 275% return Quarterly rebalancing: 368% return For me, this is a fairly definitive test, except that there are only 27 data points for the quarterly rebalancing (I wish there could be more). Clear indication that a longer RS setting and a less frequent rebalancing work best. By the way, under every one of these scenarios (all of which crushed buy-and-hold on the S&P) IWM is the current ETF of choice. Kevin

StockFetcher Forums · Filter Exchange · PORTFOLIO SELECTION AND MANAGEMENT USING RISK/REWARD RATIOS

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