Reduce The Sensitivity Setting
In the last post it was determined that enough optimization had been performed and it was time to wrap up this project. At this point in time I suggest performing a few more optimization cycles while reducing the sensitivity from 50 down to 40, 30, 20 and finally 10. Doing so will find a local maximum. The optimization steps are the same as described in the last post. You only need to change the sensitivity setting in the spreadsheet.
Generate Noisy Test Ranking Systems
Once this has been done and the reference weights have been updated and considered to be final then the next step is to generate a set on noisy ranking systems for future test purposes. This is accomplished by doing a manual recalculate on the spreadsheet, then copying the randomized data into the ranking system optimizer permutations, and finally running the ranking system optimizer.
The ten permutations should be saved as individual ranking systems. This is done by selecting the permutation as shown below.
A window will pop-up where you enter the name of the ranking system. Once this has been done then click on Save. You can then close the window.
Generate the Final Ranking System
After all ten ranking systems are saved then the final ranking system will be created. Start by block selecting the reference weights, then copying them.
Now block select the previous permutations in the Edit Permutations screen in the ranking system optimizer.
Click on the Update button to save the permutations.
Click on the Generate Permutations menu item.
Run the ranking system optimizer.
Once the optimizer has finished then click on permutation #1 as shown below. Note: there should only be one permutation.
Select Save As to rename the final ranking system.
Check to make sure you have all eleven (11) ranking systems as shown below.
3 of the 8 stock factors have been deleted from the original All Stars: Piotroski. The performance in the last bucket on the right has increased from 22% to 23.7% for 4 week rebalance. This doesn't sound like much but consider that the last bucket holds approximately 150 stocks and that the original ranking system was already quite an optimal configuration. The performance for weekly rebalance also improved.