This is my first contribution to the community here, exploring a simple method to squeeze couple of drops of alpha from the market.
The main principle behind this approach is:
- Screen the S&P 500 universe
- Select stocks with highest yield (dividend + buyback yield) which also have the lowest three year volatility
- Create an equal-weighted portfolio of these stocks, rebalance every month
This creates a basket of stocks (typically between 20 and 60) that tend to show both higher returns (outperfroms the market by 57% in 2005-2016 test) while having both lower volatility and drawdown (24% less drawdown).
Interestingly it also outperforms the two popular low volatility ETFs, the S&P Low Volatility (SPLV) and S&P High Yield Low Volatility (SPHD).
The algorithm has relatively low beta of 0.7 given it does rely on the same stocks that (roughly) compromise the S&P index.
As of November 2016 there are 20 stocks held by the system, listed below:
I was hoping to be able to replicate results from this post where I got the inspiration from, however there is a difference in returns that seems insurmountable.
I'd like to thank the entire Quantopian community for sharing the knowledge from which the code borrows a lot and Meb Faber who inspired me to think more critically about the finance world.
|Returns||1 Month||3 Month||6 Month||12 Month|
|Alpha||1 Month||3 Month||6 Month||12 Month|
|Beta||1 Month||3 Month||6 Month||12 Month|
|Sharpe||1 Month||3 Month||6 Month||12 Month|
|Sortino||1 Month||3 Month||6 Month||12 Month|
|Volatility||1 Month||3 Month||6 Month||12 Month|
|Max Drawdown||1 Month||3 Month||6 Month||12 Month|