Equity Strategist - Minimum Variance Solutions

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Equity Strategist, Minimum Variance Solutions

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Equity Strategist - Minimum Variance Solutions

  1. 1. Equity Strategist Minimum Volatility Equity Solutions – Euro Stoxx 50 Index October 2012 Q M S Advisors . .This material does not constitute investment advice and should not be viewed as tel: 078 922 08 77a current or past recommendation or a solicitation of an offer to buy or sell any e-mail: info@qmsadv.comsecurities or to adopt any investment strategy. website: www.qmsadv.com
  2. 2. Low Volatility Strategy Risk Efficiency in Passive Investing Enhancing Long-Term Portfolio Performance whileGOAL Diminishing Equity Risks Ø Delivering the best risk/return trade-of: Ø Since the 1960s, the capital asset pricing model (CAPM) brought an elegant solution to the optimization problem, arguing that the most efficient portfolio is necessarily a broad market portfolio weighted by market capitalization of stocks. Ø This corresponds to performing mean-variance optimization with market implied forecasts of risk and returns. Ø Market-capitalization weighted portfolio Ø The only portfolio that is truly "passive" in its objective on the mean-variance frontier is the Minimum Variance Portfolio (MVP). Ø MVP is an optimal portfolio that is constructed by minimizing portfolio variance. The minimum variance construction does not use stocks expected returns as inputs, and relies only on the covariance matrix. Ø Risk-efficient passive equity allocation: Ø There is a growing body of evidence of outsized ex-post risk-adjusted performance of minimum variance portfolios. Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 1
  3. 3. Low Volatility Strategy Risk Efficiency in Passive Investing Based on Historical Weekly Data from December 29th Eurostoxx 50 Low Volatility 2006 to the October 12th 2012 TR (*) Strategy (*) Historical Returns -8.792% 2.550% Historical Volatility 27.08% 20.39% Historical Returns/Risk Ratio -0.3247 0.1250 Maximum Drawdown -62.75% -46.73% Historical Skewness -1.16 -1.50 Historical Kurtosis 3.79 6.67 Jarque-Bera 248 674 Jarque-Bera: Chi-Test 0.99 0.00 Attractive historical statistical features Ø The low volatility strategy offers attractive statistical features whether considered on a standalone or total portfolio basis, and this despite the extreme market environment considered in our analysis.Source: Bloomberg, QMS Advisors Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 2
  4. 4. Low Volatility Strategy PerformanceBased on Historical Data from Dec 29th 2006 to Oct 12st 2012 140 120 115.75 Historical Performance - Base 100 on December 26th 2006 100 80 60 58.60 40 20 0 29.12.06 29.06.07 29.12.07 29.06.08 29.12.08 29.06.09 29.12.09 29.06.10 29.12.10 29.06.11 29.12.11 29.06.12 -20 Performance Differential: Low Volatility Strategy (*) Performance: Eurostoxx 50 TR (*) Performance: Low Volatility Strategy (*) Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 3
  5. 5. Low Volatility Strategy Significantly Reduced VolatilityBased on Historical Data from Dec 29th 2006 to Oct 12st 2012 50% -35% 45% -30% Volatility Differential (in %, inverted scale) 40% Volatility (52 Weeks Rolling in % p.a.) -25% 35% -20% 30% 25% -15% 20% -10% 15% -5% 10% 5% 0% 04.01.2008 04.03.2008 04.05.2008 04.07.2008 04.09.2008 04.11.2008 04.01.2009 04.03.2009 04.05.2009 04.07.2009 04.09.2009 04.11.2009 04.01.2010 04.03.2010 04.05.2010 04.07.2010 04.09.2010 04.11.2010 04.01.2011 04.03.2011 04.05.2011 04.07.2011 04.09.2011 04.11.2011 04.01.2012 04.03.2012 04.05.2012 04.07.2012 04.09.2012 Volatility Differential: Low Volatility Strategy (*) Volatility (Rolling 52 Weeks) Eurostoxx 50 TR (*) Volatility (Rolling 52 Weeks) Low Volatility Strategy (*) Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 4
  6. 6. Low Volatility Strategy Consistently Higher Information RatiosBased on Historical Data from Dec 29th 2006 to Oct 12st 2012 4 1.2 3 1 Information Ratio Differential (52 Weeks Rolling) Information Ratio (52 Weeks Rolling) 2 0.8 1 0.6 0 0.4 28.12.2007 28.02.2008 28.04.2008 28.06.2008 28.08.2008 28.10.2008 28.12.2008 28.02.2009 28.04.2009 28.06.2009 28.08.2009 28.10.2009 28.12.2009 28.02.2010 28.04.2010 28.06.2010 28.08.2010 28.10.2010 28.12.2010 28.02.2011 28.04.2011 28.06.2011 28.08.2011 28.10.2011 28.12.2011 28.02.2012 28.04.2012 28.06.2012 28.08.2012 -1 0.2 -2 0 Information Ratio Differential: Low Volatility Strategy (*) Information Ratio: Eurostoxx 50 TR (*) Information Ratio: Low Volatility Strategy (*) Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 5
  7. 7. Maximum Drawdown from December 29th 2006 (in %) 0% -70% -60% -50% -40% -30% -20% -10% 29.12.2006 28.02.2007 29.04.2007 29.06.2007 29.08.2007 29.10.2007 29.12.2007 29.02.2008 Q.M.S Advisors 29.04.2008 29.06.2008 29.08.2008 29.10.2008 29.12.2008 28.02.2009 29.04.2009 Maximum Drawdown: Low Volatility Strategy (*) 29.06.2009 29.08.2009 Max. Drawdown Differential: Low Volatility Strategy (*) 29.10.2009 Reduced Drawdown Risks Based on Historical Data from Dec 29th 2006 to Oct 12st 2012 29.12.2009 28.02.2010 29.04.2010 29.06.2010 29.08.2010 Low Volatility Strategy 29.10.2010 29.12.2010 28.02.2011 29.04.2011 29.06.2011 29.08.2011 | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com 29.10.2011 29.12.2011 29.02.2012 Maximum Drawdown: Eurostoxx 50 TR (*) 29.04.2012 29.06.2012 29.08.2012 8% -2% 18% 28% 38% 48% 58% M. Drawdown Differential (in %)Page 6
  8. 8. Low Volatility Strategy Comparative Distribution of Weekly ReturnsBased on Historical Data from Dec 29th 2006 to Oct 12st 2012 25% 100% 90% 20% 80% Fréquence (nombre dobservations) 70% 15% 60% 50% 10% 40% 30% 5% 20% 10% 0% 0% -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% Low Volatility Strategy (*) Eurostoxx 50 TR (*) Eurostoxx 50 TR (*) Low Volatility Strategy (*) Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 7
  9. 9. Low Volatility Strategy Relative Weekly Distribution of ReturnsBased on Historical Data from Dec 29th 2006 to Oct 12st 2012 15% y = 0.725x + 0.002 R2 = 0.928 10% 5% Low Volatility Strategy (*) 0% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% -5% -10% -15% -20% -25% -30% Eurostoxx 50 TR (*) Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 8
  10. 10. Low Volatility Strategy A Simple Approach to Higher Portfolio EfficiencyØ Low Volatility Strategies offer a simple, transparent and highly customizable way to tap one of the most recognized and documented source of alpha: Ø This passive strategy utilizes a systematic approach that does not rely on forecasts of stock returns and uses as input only the covariance matrix. Ø The portfolio resulting from minimum variance optimization has the smallest ex-ante volatility, and exhibits a significant reduction in ex-post risk as well, with respect to the selected benchmark Ø Historically the strategy has produced significantly higher returns with lower realized volatility when compared to its benchmark; resulting in attractive Sharpe ratios. Ø Empirical evidence shows that the design of the optimization problem plays a much greater role when assuming homogeneous return estimates. This in turn results in allocations that maintain their promise: exhibiting lower risk in the future while giving full exposure to the equity market Q.M.S Advisors | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com Page 9

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