Is there a “trick” to good results for risk parity backtests? In their April 2014 brief research paper entitled “The Risks of Risk Parity”, the Brandes Institute examines the sustainability of a critical performance driver for the risk parity asset allocation approach. This approach weights asset classes such that their expected contributions to overall portfolio risk (volatility) are equal, generally by shifting conventional portfolio weights substantially from equities to bonds. Using hypothetical portfolio performance during 1994 through 2013 and bond yield data during 1871 through 2013, they find that: Keep Reading
Investing Research Articles
October 5, 2015 - Fundamental Valuation
How do those whose jobs involve stock valuation perform this task? In their September 2015 paper entitled “Equity Valuation: A Survey of Professional Practice”, Jerald Pinto, Thomas Robinson and John Stowe report results of a 38-question equity valuation practices survey sent to 13,500 CFA Institute members with equity analysis job responsibilities. They guided respondents through the survey via the following introductory question:
“In evaluating individual equity securities, which of the following approaches to valuation do you use? (Select all that apply)
a) A market multiples approach (e.g., based on price-to-earnings, enterprise value-to-EBITDA, or other multiples)
b) A present discounted value approach (e.g., based on forecasts of future dividends, free cash flows, or economic value added/residual income)―also known as the income approach
c) An asset-based approach (e.g., based on book value, adjusted book value, asset market values, or asset replacement costs)
d) A (real) options approach (using options models to value equity)
e) Other (please specify)”
Using responses from 1,980 completed questionnaires, they find that: Keep Reading
October 2, 2015 - Weekly Summary
Below is a weekly summary of our research findings for 9/28/15 through 10/2/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.
October 2, 2015 - Technical Trading
Are annual stock market winning and losing streaks informative about future market performance? To investigate, we consider up and down annual streaks for the Dow Jones Industrial Average (DJIA). We look at streaks in two ways:
- Retrospective (non-overlapping). We know the total duration of each streak.
- Experienced (real-time and partially overlapping). We know each year how long a streak has lasted, but we don’t know when it will end.
Using DJIA annual returns for 1929 through 2014 (86 years), we find that: Keep Reading
We have updated the the monthly asset class ETF value strategy weights and associated performance data at Value Strategy.
October 1, 2015 - Economic Indicators
Does expansion (contraction) of consumer credit indicate growing (shrinking) corporate sales, earnings and ultimately stock prices? The Federal Reserve collects and publishes U.S. consumer credit data on a monthly basis with a delay of about five weeks. Using monthly seasonally adjusted total U.S. consumer credit for January 1943 through July 2015 and monthly Dow Jones Industrial Average (DJIA) closes for January 1943 through August 2015 (871-872 months), we find that: Keep Reading
The home page and “Momentum Strategy” now show preliminary asset class ETF momentum strategy positions for October 2015. The difference in past returns between third and fourth places is large, so the top three are very unlikely to change by the close.
Risk-averse investors following the strategy may want to consider the findings in “SACEMS with Three Copies of Cash”.
Robert Carver introduces his 2015 book, Systematic Trading: A Unique New Method for Designing Trading and Investing Systems, by stating that: “I don’t believe there is any magic system that will automatically make you huge profits, and you should be wary of anyone who says otherwise, especially if they want to sell it to you. Instead, success in systematic trading is mostly down to avoiding common mistakes such as over complicating your system, being too optimistic about likely returns, taking excessive risks, and trading too often. I will help you avoid these errors. This won’t guarantee returns, but it will make failure less likely. My framework…can be adapted to meet your needs. …Each element of the framework has been carefully designed… I’ll explain the available options, which I prefer, and why.” Based on his experience as a trader/portfolio manager and specific research, he concludes that: Keep Reading