Portfolio 1.5 - EW Performance Analysis
November 16th 2006 03:00
The results generated are suggestively positive with the performance of the portfolio exceeding expectations. The Portfolio 1.5 - EW, so far,have beaten the market and the returns were well ahead of its expected returns. The following are the findings from the Performance Analysis in terms of expected returns, risk and market relative performance:
Expected Return
Risk Free Rate (Rf) = 6 % (cash rate average based on recent RBA data)
Market Return (Rm) = 9.32% (ex-ante average market returns)
Portfolio Beta (Bp) = 1.16 (computed weighted portfolio beta)
Expected Returns, E(R) = Rf Bp x (Rm - Rf)
= 6% 1.16 x (9.32% - 6 %)
= 9.86%
Realised Return = 31% (as of 15th November 2006, [$55,173 - $ 42,117/$42,117])
Jensen Alpha = 31% - 9.86% = 21.14%
Beating the market
Based on computations from 1st August to 31st October, 2006, the daily average arithmetic returns from the portfolio and market index (ASX S&P 200) are 5.43% and 0.14% respectively, with the portfolio beating the market by an average of 5.30% on a daily basis.
Risk-Adjusted Performance
Arithmetic Average Returns = 5.43%
Annualised Returns (x250) = 1,359%
Standard Deviations = 22%
Annualised Standard Deviations = 354%
Risk Free Rate = 6%
Sharpe Ratio = (1,359% - 354%)/(6%)
= 3.82
The reward for taking for each percentage of risk (standard deviation), the reward is a return of 3.82%. The ratio for the market index is 2.38.
The findings above finally proved that the Portfolio 1.5 - EW is indeed capable of beating the index, risk free rate and its expected returns, although it must be noted that it is riskier than the market index by 16 basis points. A rather impressive performance for a passive portfolio, however, the mechanism driving it is still yet unknown and whether it's a story of mispricing or risk-based considerations is yet to be determined or it may never be proved absolutely as it could be a combination of the two stories. But, I hope I could formulate a hypothesis to test the mechanism in the future.
Related Posts:
The Birth of Portfolio 1.5 - EW
It's certainly making money
Expected Return
Risk Free Rate (Rf) = 6 % (cash rate average based on recent RBA data)
Market Return (Rm) = 9.32% (ex-ante average market returns)
Portfolio Beta (Bp) = 1.16 (computed weighted portfolio beta)
Expected Returns, E(R) = Rf Bp x (Rm - Rf)
= 6% 1.16 x (9.32% - 6 %)
= 9.86%
Realised Return = 31% (as of 15th November 2006, [$55,173 - $ 42,117/$42,117])
Jensen Alpha = 31% - 9.86% = 21.14%
Beating the market
Based on computations from 1st August to 31st October, 2006, the daily average arithmetic returns from the portfolio and market index (ASX S&P 200) are 5.43% and 0.14% respectively, with the portfolio beating the market by an average of 5.30% on a daily basis.
Risk-Adjusted Performance
Arithmetic Average Returns = 5.43%
Annualised Returns (x250) = 1,359%
Standard Deviations = 22%
Annualised Standard Deviations = 354%
Risk Free Rate = 6%
Sharpe Ratio = (1,359% - 354%)/(6%)
= 3.82
The reward for taking for each percentage of risk (standard deviation), the reward is a return of 3.82%. The ratio for the market index is 2.38.
The findings above finally proved that the Portfolio 1.5 - EW is indeed capable of beating the index, risk free rate and its expected returns, although it must be noted that it is riskier than the market index by 16 basis points. A rather impressive performance for a passive portfolio, however, the mechanism driving it is still yet unknown and whether it's a story of mispricing or risk-based considerations is yet to be determined or it may never be proved absolutely as it could be a combination of the two stories. But, I hope I could formulate a hypothesis to test the mechanism in the future.
Related Posts:
The Birth of Portfolio 1.5 - EW
It's certainly making money
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