NexusFi: Find Your Edge


Home Menu

 





Baffling example of portfolio returns dominating any of its members


Discussion in Psychology and Money Management

Updated
      Top Posters
    1. looks_one rocktrader with 3 posts (0 thanks)
    2. looks_two Quick Summary with 1 posts (0 thanks)
    3. looks_3 bancor with 1 posts (1 thanks)
    4. looks_4 shodson with 1 posts (1 thanks)
    1. trending_up 1,231 views
    2. thumb_up 3 thanks given
    3. group 5 followers
    1. forum 7 posts
    2. attach_file 0 attachments




 
Search this Thread

Baffling example of portfolio returns dominating any of its members

  #1 (permalink)
rocktrader
coimbatore, TN, India
 
Posts: 27 since Mar 2014
Thanks Given: 23
Thanks Received: 18



I was reading above table from this book, sample page

I am surprised to see that portfolio did well than any of its members.
The author clearly says that table is equally weighted assets i.e simply divide your money into 7 and buy 7 assets.

I am still baffled, after 40 years, the portfolio shows a positive return but most of portfolio members are in negative !?
I can see why portfolio can be positive if some of the assets were shorted but author seems to be long on all assets!

Am I missing something? How is this possible?
Perhaps author rebalanced the portfolio every month when rolling his futures contracts to next month in this 40 year period?

I wish author had a returns table for his portfolio along with 7 commodities, could some one help with a sample table (say 5 years with 3 assets) to understand this phenomenon?

Thanks,
RT

Reply With Quote

Can you help answer these questions
from other members on NexusFi?
Futures True Range Report
The Elite Circle
Better Renko Gaps
The Elite Circle
The space time continuum and the dynamics of a financial …
Emini and Emicro Index
Deepmoney LLM
Elite Quantitative GenAI/LLM
My NT8 Volume Profile Split by Asian/Euro/Open
NinjaTrader
 
  #3 (permalink)
bancor
euroland
 
Posts: 5 since May 2012
Thanks Given: 1
Thanks Received: 3


I think it's the power of rebalancing

Reply With Quote
Thanked by:
  #4 (permalink)
 
shodson's Avatar
 shodson 
OC, California, USA
Quantoholic
 
Experience: Advanced
Platform: IB/TWS, NinjaTrader, ToS
Broker: IB, ToS, Kinetick
Trading: stocks, options, futures, VIX
Posts: 1,976 since Jun 2009
Thanks Given: 533
Thanks Received: 3,709

which book?

Follow me on Twitter Visit my NexusFi Trade Journal Reply With Quote
Thanked by:
  #5 (permalink)
 kevinkdog   is a Vendor
 
Posts: 3,647 since Jul 2012
Thanks Given: 1,890
Thanks Received: 7,338

Rather than have all of us speculate, I'd recommend you contact the author.

Here is a link to Amazon author page, where you can start discussions. I'm sure he'll see it, and hopefully clear it up for you.

https://www.amazon.com/Aaron-Brown/e/B001JSCJ6A/ref=ntt_dp_epwbk_0

Follow me on Twitter Reply With Quote
Thanked by:
  #6 (permalink)
rocktrader
coimbatore, TN, India
 
Posts: 27 since Mar 2014
Thanks Given: 23
Thanks Received: 18

I downloaded monthly returns for last 30 years of coco, wheat and silver from Index Mundi - Country Facts

Got my hands dirty and tried monthly rebalancing of silver:wheat:coco = 8:3:1

Using monthly returns for the period: Apr 1985 to Apr 2015

Portfolio returns: 186.7 %

Where as
Silver returns: 153.02 %
Wheat returns: 50.71 %
Coco returns: 28.00 %

My take away is:
With proper weights we can have a portfolio dominating any of its members.

In author's case it seems equally weighing the assets happened to work well and portfolio dominated the members. In the book he further goes on properly weighing the portfolio members and taking some short positions too, to further optimize the returns which are even better than the table I posted.

From the yearly returns of 30 years stats for silver, wheat coco respectively:
mean: 7.623 SD: 35.183
mean: 5.244 SD: 29.951
mean: 2.743 SD: 19.751

For portfolio:
mean: 5.522 SD: 23.978

SD (Standard Deviation) of portfolio is lesser than silver and wheat, providing the magic required to beat the individual top performers over time! This is inline with authors explanation of table I posted. Author goes further explaining how optimally risking from the point of view of Kelly investor mindset made this achievement possible.

I think I have grasped what author is saying (although his table has some gaps in my understanding, I have constructed another equivalent table to validate/understand his ideas!).

Thanks guys!

Reply With Quote
  #7 (permalink)
 
Ming80's Avatar
 Ming80 
Singapore
 
Experience: None
Platform: -
Trading: Diversified
Posts: 41 since Jan 2012
Thanks Given: 25
Thanks Received: 51

hmm just curious, wouldn't 8:3:1 imply a leverage factor of 1.2?

i would have thought the idea behind was to show an outperformance of the best individual component using only rebalancing techniques not to be comingled with weighting schemes.



rocktrader View Post
I downloaded monthly returns for last 30 years of coco, wheat and silver from Index Mundi - Country Facts

Got my hands dirty and tried monthly rebalancing of silver:wheat:coco = 8:3:1

Using monthly returns for the period: Apr 1985 to Apr 2015

Portfolio returns: 186.7 %

Where as
Silver returns: 153.02 %
Wheat returns: 50.71 %
Coco returns: 28.00 %

My take away is:
With proper weights we can have a portfolio dominating any of its members.

In author's case it seems equally weighing the assets happened to work well and portfolio dominated the members. In the book he further goes on properly weighing the portfolio members and taking some short positions too, to further optimize the returns which are even better than the table I posted.

From the yearly returns of 30 years stats for silver, wheat coco respectively:
mean: 7.623 SD: 35.183
mean: 5.244 SD: 29.951
mean: 2.743 SD: 19.751

For portfolio:
mean: 5.522 SD: 23.978

SD (Standard Deviation) of portfolio is lesser than silver and wheat, providing the magic required to beat the individual top performers over time! This is inline with authors explanation of table I posted. Author goes further explaining how optimally risking from the point of view of Kelly investor mindset made this achievement possible.

I think I have grasped what author is saying (although his table has some gaps in my understanding, I have constructed another equivalent table to validate/understand his ideas!).

Thanks guys!


Reply With Quote
  #8 (permalink)
rocktrader
coimbatore, TN, India
 
Posts: 27 since Mar 2014
Thanks Given: 23
Thanks Received: 18


Ming80 View Post
hmm just curious, wouldn't 8:3:1 imply a leverage factor of 1.2?

i would have thought the idea behind was to show an outperformance of the best individual component using only rebalancing techniques not to be comingled with weighting schemes.

To keep the calculations simple, I simply divided the money at start of month into 12 parts and allocated 8 parts to silver at that month's silver price and so on, it will not be proper lot size etc... but for self demonstration close enough is good enough. Yeah, you are right author shows portfolio outperforming by just rebalancing since there is no table of prices, I was just not able to see how this can work. If rebalancing can work with 8:3:1 well there is no surprise it can work 1:1:1 for some portfolios... that's my take away in a roundabout way.

Reply With Quote




Last Updated on May 22, 2015


© 2024 NexusFi™, s.a., All Rights Reserved.
Av Ricardo J. Alfaro, Century Tower, Panama City, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada)
All information is for educational use only and is not investment advice. There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
About Us - Contact Us - Site Rules, Acceptable Use, and Terms and Conditions - Privacy Policy - Downloads - Top
no new posts