February 22, 2012 - Commodity Futures, Strategic Allocation
It is plausible that crude oil as a dominant energy commodity has return characteristics substantially different from those of other commodities and asset classes, and therefore represent a good diversification opprotunity. To check, we add the United States Oil Fund (USO) to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for USO and the average pairwise correlation of USO monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without USO. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for USO and the above nine asset class proxies from September 2006 from September 2006 (first return available for all nine of the above in the momentum strategy test) through January 2012 (65 monthly returns), we find that: More…
February 21, 2012 - Big Ideas, Strategic Allocation
Some experts use the mean-variance analysis of Modern Portfolio Theory (MPT), which penalizes large upside volatility, to measure portfolio efficiency. Others use Second-order Stochastic Dominance (SSD) analysis, purer mathematically than MPT but open to unrealistic investor behavior. Is there a better way? In the February 2012 version of his paper entitled “The Passive Stock Market Portfolio is Highly Inefficient for Almost All Investors”, Thierry Post describes and tests a portfolio efficiency measure based on an Almost Second-order Stochastic Dominance (ASSD) that aims to exclude unrealistic investor behaviors. He applies the measure to a market portfolio (value-weighted average of NYSE, AMEX and NASDAQ stocks) and three alternative sets of ten equity portfolios formed using NYSE decile breakpoints for: (1) market capitalization (size); (2) book-to-market ratio; and, (3) past 11-month return with skip month (momentum). He considers investment horizons of one, 12 and 120 months over sample periods of 1926-2011 and 1963-2011. Using monthly value-weighted returns and contemporaneous stock/firm characteristics from July 1926 through December 2011 (1,026 months), along with the contemporaneous one-month Treasury bill yield as the risk-free rate, he finds that: More…
February 20, 2012 - Bonds, Strategic Allocation
It is plausible that high-yield corporate bonds have return characteristics substantially different from those of other asset classes, and therefore represent a good diversification opprotunity. To check, we add iShares iBoxx $ HY Corp Bond Fund (HYG) to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for HYG and the average pairwise correlation of HYG monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without HYG. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for HYG and the above nine asset class proxies from May 2007 (first return available for HYG) through January 2012 (57 monthly returns), we find that: More…
February 20, 2012 - Bonds, Strategic Allocation
Treasury Inflation-Protected Securities (TIPS), offering an explicit inflation hedge, may be an attractive asset for strategic diversification. To check, we add iShares Barclays TIPS Bond Fund (TIP) to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for TIP and the average pairwise correlation of TIP monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without TIP. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for TIP and the above nine asset class proxies from September 2006 (first return available for all nine of the above in the momentum strategy test) through January 2012 (65 monthly returns), we find that: More…
