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Global Asset Allocation and Stock Selection
Assignment #1
Comparison of Investment Styles along Tactical Trading Strategies
Gold Asset Management
Artima SuraphongchaiGenzo Kimura
Andrew (Jing) LiuJoseph Sun
Stefan Prawitz
AGENDA
Strategy Evaluation
Key Take-Aways
Methodology Overview
Forecasting Model
Country-based Investing
US UK JP DE
Sector-based Investing
Financial
Health
Utilities
Material
Mixed Investing
US DE
Financial
Health
Methodology Overview: 3 Investment Styles
Each Investment Style Evaluated Across 6 Tactical Trading Strategies
Tactical Trading Strategies Description
Strategy 0: Buy-and-hold
• Buy & Hold sub-strategies assume equal weights for all 4 asset classes.
Strategy 1A: Long-or-Cash (No Filter Rule)
• Compares highest forecasted return to the 1-month Eurodollar deposit return
• If forecasted returns exceed the deposit return, go “Long” in the asset class with highest forecasted return.
Strategy 1B: Long-or-Cash (Filter Rule)
• Same as strategy 1A, but highest forecasted return must exceed 1-month Eurodollar deposit return by at least 0.01% on a monthly basis
• Only then will we go “Long” on the asset class.
Strategy 2A: 2-Long-Positions (Equal Weights)
• Compares two highest forecasted returns to 1-month Eurodollar deposit return
• If both forecast returns exceed deposit return, then go “Long” • If only one asset exceeds deposit return, go only “Long” in one asset and
deposit the rest• Equal weights for both positions (50%-50%)
Strategy 2B: 2-Long-Positions (Weights 2:1)
• Same as Strategy 2B, but asset with highest forecast twice that of the second highest forecast
Strategy 3: Long-and-Short
• Go “Long” in asset with highest positive forecast and “Short” in the lowest negative return forecast
• Positive forecast must also exceed deposit return. If there are no positive forecasts, then deposit. If there are no negative forecast, no short position is taken
Country-based Forecasting Model
Variables US Germany Japan UK
Oil Price Change
Spread Change
Dividend Yield
Price-Book
Price-Earnings
Relative Change to Term Structure
Note:• P/E ratio of US equities• P/E ratio of UK equities• Change in spread of 10-year German Bunds over 10-year US Treasuries• Dividend Yield of Japanese equities• Price-Book Ratio of Japanese equities• UK term structure
(3)
(1)(1)
(4)
(5)
(6)
(2)
Sector-based Forecasting Model
Finance Health Utilities Material
Oil Price Change
Yield Change in 10Y US-Treasuries
US Price-Earnings
Change of Relative US Term Structure
Historical Efficiency Frontier (Strategic View)
Comparison of Efficient Frontiers Historical (Strategic) View01/1988 - 12/2003
0.005
0.007
0.009
0.011
0.013
0.015
0.04 0.05 0.06 0.07Portfolio Standard Deviation
Ex
pe
cte
d R
etu
rn
Countries Sectors Combined (2 Countries, 2 Sectors) County Assets Sector Assets
Predicted Efficiency Frontier (Tactical View)
Comparison of Efficient Frontiers Predicted (Tactical) View01/2004
0.002
0.004
0.006
0.008
0.010
0.012
0.014
0.016
0.018
0.020
0.03 0.04 0.05 0.06 0.07Portfolio Standard Deviation
Ex
pe
cte
d R
etu
rn
Countries Sectors Combined (2 Countries, 2 Sectors) County Assets Sector Assets
Investment Style Comparison (Return)
Average Monthly Return
0.0040
0.0060
0.0080
0.0100
0.0120
0.0140
0.0160
0.0180
0.0200
0. Buy-and-Hold withequal initial weights
1a. Country Long orCash (No Filter Rule)
1b. Country Long orCash (Filter Rule)
2a. Long Positions (no filter, equal
weights)
2b. Long Positions (no filter, weights 2:1)
3. Long-and-Short
Trading Strategy
Re
turn
Country Only
Sector Only
Combined
0.0071MSCI World Return
Investment Style Comparison (Standard Deviation)
MSCI World Std Dev
Historical Monthly Standard Deviation of Return
0.0150
0.0200
0.0250
0.0300
0.0350
0.0400
0.0450
0.0500
0.0550
0. Buy-and-Hold withequal initial weights
1a. Country Long or Cash(No Filter Rule)
1b. Country Long or Cash(Filter Rule)
2a. Long Positions (no filter, equal weights)
2b. Long Positions (no filter, weights 2:1)
3. Long-and-Short
Trading Strategy
Ret
urn
Country Only
Sector Only
Combined
0.0424
Investment Style Comparison (Sharpe Ratio)
Historical Average Monthly Sharpe ratio
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0. Buy-and-Hold withequal initial weights
1a. Country Long or Cash(No Filter Rule)
1b. Country Long or Cash(Filter Rule)
2a. Long Positions (no filter, equal weights)
2b. Long Positions (no filter, weights 2:1)
3. Long-and-Short
Trading Strategy
Ret
urn
Country Only
Sector Only
Combined
MSCI World Sharpe Ratio0.1672
Two way comparison:Ranking System for Combination Evaluation (I)
Average monthly returnCountry Sector Combined
0 0.0072 0.0074 0.00911a 0.0177 0.0136 0.01791b 0.0162 0.0138 0.01722a 0.0159 0.0122 0.01552b 0.0165 0.0126 0.01633 0.0170 0.0155 0.0184
Standard Deviation
Rank of Standard Deviation
Sharpe Ratio Rank of Sharpe Ratio
% of non-negative
Rank of % of non-negative
Maximum Return
Rank of Maximum Return
Minimum Return
Rank of Minimum Return
Rank of Average monthly returnCountry Sector Combined
0 18 17 161a 3 13 21b 8 12 42a 9 15 102b 6 14 73 5 11 1
Two way comparison :Ranking System for Combination Evaluation (II)
Rank of Average monthly returnCountry Sector Combined
0 18 17 161a 3 13 21b 8 12 42a 9 15 102b 6 14 73 5 11 1
Rank of Standard DeviationCountry Sector Combined
0 16 12 141a 18 11 151b 13 3 82a 7 1 22b 9 4 53 6 10 17
Rank of Sharpe RatioCountry Sector Combined
0 18 17 161a 13 15 61b 9 10 42a 5 12 22b 7 14 33 1 11 8
Rank of Percentage of Non-negative ReturnCountry Sector Combined
0 17 18 161a 11 7 91b 4 1 22a 10 7 32b 12 5 53 14 13 14
Rank of Maximum ReturnCountry Sector Combined
0 17 18 161a 4 1 51b 8 1 52a 15 14 132b 12 10 93 11 1 5
Rank of Minimum ReturnCountry Sector Combined
0 17 16 181a 7 13 121b 6 13 12a 5 8 82b 4 10 103 3 13 2
Investment Style ComparisonOverall score shows Mixed Strategy is the bestPlot of efficiency frontier favors country-only strategy Poor sector returns probably due to high inter-correlation
Tactical trading Strategy ComparisonOverall score shows 1b: Long-or-Cash (Filter Rule) is the best Little difference between 2-Long and Long-Short trading strategiesBuy & Hold strategy has the lowest performance (But still beat MSCI World)
Best combinations is to have Combined asset classes and implement Long-Cash (with Filter) trading strategy
Key Take-Aways
Country Sector Combined0 Buy & Hold 17 16 16 171a Long-Cash (No Filter) 9 10 8 91b Long-Cash (Filter) 8 7 4 62a 2Long (Equal Weight) 9 10 6 82b 2Long (Weights 2:1) 8 10 7 83 Long-Short 7 10 8 8
10 10 8
Global Asset Allocation and Stock Selection
Assignment #1
Any Questions?
Gold Asset Management
Artima SuraphongchaiGenzo Kimura
Andrew (Jing) LiuJoseph Sun
Stefan Prawitz
Regression Summary:Solid Adj-R2 and High Predicting Power
Adjusted R square
Correct Direction
Count
Total Observations
PercentageBuy & Hold
Country-based US 10.28 % 134 192 70% 63%
Germany 5.78 % 126 192 60% 58%
Japan 4.32 % 104 180 58% 46%
UK 5.13 % 118 192 61% 57%
Sector-based Finance 9.18 % 168 262 64% 66%
Health 7.63 % 175 262 67% 65%
Utility 4.72 % 127 192 66% 60%
Material 16.57 % 77 108 71% 59%
GARCH model (Expected variance)
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 10
0.2
0.4
0.6
0.8
40
60
80
100
120
140
160
180
200
Parameter B
Parameter A
Fig II. Utility Sector Likelihood Function
180-200
160-180
140-160
120-140
100-120
80-100
60-80
40-60
A + B = 0.68 << 1
Strategy Sub-Strategy % Rank % Rank % RankCountry-Only 0 0.720% 3 4.346% 3 16.56% 3
1A 1.771% 2 5.059% 3 35.02% 21B 1.623% 2 4.232% 3 38.36% 22A 1.586% 1 3.798% 3 41.76% 22B 1.648% 1 4.013% 3 41.07% 23 1.702% 2 3.753% 1 45.36% 1
Average Rank 1.8 2.7 2.0Sector-Only 0 0.742% 2 4.204% 1 17.64% 2
1A 1.359% 3 4.186% 1 32.46% 31B 1.377% 3 3.593% 1 38.33% 32A 1.216% 3 3.399% 1 35.77% 32B 1.264% 3 3.625% 1 34.86% 33 1.547% 3 4.108% 2 37.66% 3
Average Rank 2.8 1.2 2.8
Mixed 0 0.911% 1 4.310% 2 21.13% 11A 1.792% 1 4.340% 2 41.30% 11B 1.720% 1 3.847% 2 44.71% 12A 1.547% 2 3.427% 2 45.14% 12B 1.629% 2 3.634% 2 44.83% 13 1.839% 1 4.483% 3 41.04% 2
Average Rank 1.3 2.2 1.2
Average Returns Standard Deviation Sharpe Ratio
Investment Style Comparison Table
Strategy Comparison (Maximum Return)
Historical Maximum Monthly Return
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
0.3000
0. Buy-and-Hold withequal initial weights
1a. Country Long or Cash(No Filter Rule)
1b. Country Long or Cash(Filter Rule)
2a. Long Positions (no filter, equal weights)
2b. Long Positions (no filter, weights 2:1)
3. Long-and-Short
Trading Strategy
Ret
urn
Country Only
Sector Only
Combined
Strategy Comparison (Minimum Return)
Historical Minimum Monthly Return
-0.2000
-0.1800
-0.1600
-0.1400
-0.1200
-0.1000
-0.0800
-0.0600
-0.0400
-0.0200
0.0000
0. Buy-and-Hold withequal initial weights
1a. Country Long or Cash(No Filter Rule)
1b. Country Long or Cash(Filter Rule)
2a. Long Positions (no filter, equal weights)
2b. Long Positions (no filter, weights 2:1)
3. Long-and-Short
Trading Strategy
Ret
urn
Country Only
Sector Only
Combined
Global Industry Classification (GICS)
Sector Description
Financials Sector Banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.
Health Care Sector Two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products
Utilities Sector Electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and non-nuclear facilities.
Materials Sector Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel.
Source: MSCI website
Note: • 10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom)• 24 Industry Groups• 62 Industries• 132 Sub-industries