Interim Review - Team Freezen’s Portfolio Strategy
To reasonably allocate $10 million into different asset classes, we used optimal portfolio strategy to calculate optimal weight. We searched for benchmark data for each asset class
(Exhibit 1), and used Markowitz Formulas to get portfolio return and standard deviation. To maximize the portfolio Sharpe Ratio, we used solver to get optimal weight of each asset class
(Exhibit 2). The result shows that we need to invest 100% capital into domestic equity.
However, we set aside 10% cash to buffer the downside risk to maintain our portfolio liquidity level in a good condition.
II. Industry Selection—Momentum Model
First, we chose our sectors based on Momentum Model. Under this strategy, we believe that the sectors that performed well in the past will continue to do well in the future.
We first collected the average daily returns of past 6 months for 9 sectors, then ranked 9 sectors from high to low. Based on the past performance, we picked 3 highest sectors
(Technology, Healthcare, Material) (Exhibit 3a) and went long the equities in these three sectors. At the end of September, we repeated the momentum model using the latest six months data and found out the material sector was not on top 3 lists. Therefore, we replaced
Material with Finance sector (Exhibit 3b).
The ETF for 9 sectors are: XLP (Consumer Staples, Consumer defensive), XLE(Energy),
XLF(Finance), XLV(Health Care), XLI(Industry), XLK(Technology), XLY(Consumer
Discrete, Consumer cyclical& communication service),XLB(Material), XLU(Utility).
III. Stock Selection within Each Sector
In September, we selected 5 important financial ratios as our screening criteria within each sector. We not only focused on historical earnings performance, but also emphasized leverage level and its potential growth. Then we…