Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

Test Environment

I've changed my plan a little bit from what I described in yesterday's post. I realized that no I'm not Superman and I can't afford to spend several months on this project. In other words, a few simplifications were in order.

First of all, I decided not to test every sector for every factor. Instead I will test the entire target universe for all 107 factors, then afterwards determine if individual sectors are covered by the stock factors. If not, then I will further test those sectors.

In addition, I won't be testing for rising/falling interest rates at this stage but instead I will do so during RS optimization. A separate project will be initiated to discover what factors work best in various economic conditions.

Stock Ranking Systems

So now I would like to show my "test environment". Believe it or not, I have 107 individual ranking systems, each with one stock factor corresponding to what is in the spreadsheet (see last post). Skeptics can view the screenshot below.

Test Universe

The test universe is the same as I described in the last post except I have removed the sector rule.  

The first step will be to backtest the complete target universe, even stock-IDs only.  Note that the same screen is used to test the target universe as the individual stock factors.  The Rule Rank>80 is disabled for the universe backtest.  The backtest setup and results are shown below.   The stock universe backtest Alpha is 7.5% so individual factors have to perform much better to ultimately be chosen for the ranking system.

Stock Factor Tests

Once the universe results have been downloaded and cut/pasted into the factor-discovery spreadsheet (see previous post) then I can proceed with backtesting each individual factor.  The ranking system is selected from the Main Settings Tab.  The rule Rank>80 is enabled on the Rules Tab.  The screen setup is shown below.  The Backtest Tab setup is the same as for the universe backtest.

And now I'm away to the races!  I should be finished the first round of testing (all 107 factors) in 4-8 hours. 

by Steve Auger