This post describes the first draft of the Poor Man's Hedge Fund
portfolio. (This is noted as a first draft because there are several XLF members which exhibited very poor regressions and probably need
data cleaning.) As I noted in the prior post, I took all eighty current members for the
S&P Select Sector SPDR for the Financials
and regressed the adjusted monthly returns of each stock onto the series of monthly returns of the
dynamic trading risk factor. Using the R²
for the regressions as a ranking factor, we then picked the top five stocks to build an equal rated portfolio.
These stocks are:
- Invesco IVZ
- Goldman Sachs GS
- T. Rowe Price TROW
- Morgan Stanley MS
- Ameriprise Financial AMP.
As noted above, we are seeking to choose a portfolio that comprises the five stocks with the highest
R²s for regression of the adjusted monthly returns onto the dynamic trading risk factor.
We find a equal weighted portfolio has a regression R² of 69%; an α of
(−1.13 ± 0.48) %/month; and, a β of 3.54 ± 0.24 onto the same risk factor.
Therefore, the final portfolio is chosen to weight each stock's dollar value by 5.6% and the residual
72% of the assets are put in treasury bills. In sample, this combination will deliver a portfolio with an
effective α of (−11 ± 14) bp/month and a β of 1 ± 0.07. The
expected mean return due to the dynamic trading risk factor is 50 bp/month, so we expect this portfolio to deliver
an average return of 5% per annum when held entirely passively.