Description of Max Sharpe Portfolio

This portfolio has been optimized to provide the highest Sharpe Ratio, which is a metric that compares the amount of return versus the amount of risk, based on historical data. Return is based on CAGR and risk is based on volatility. The portfolio is well suited for risk adverse investors with moderate growth expectations.

Please note that this portfolio might use leveraged ETF and single stocks. Should these not be allowed in your retirement account please see our 401k and IRS compatible Conservative, Moderate, and Aggressive Risk Portfolios. Contact us for special requirements.

Methodology & Assets
This portfolio is constructed by our proprietary optimization alogrithm based on Modern Portfolio Theory pioneered by Nobel Laureate Harry Markowitz. Using historical returns, the algorithm finds the asset allocation that produced the highest Sharpe ratio.

While this portfolio provides an optimized asset allocation based on historical returns, your investment objectives, risk profile and personal experience are important factors when deciding on the best investment vehicle for yourself. You can also use the Portfolio Builder or Portfolio Optimizer to construct your own personalized portfolio.

Assets and weight constraints used in the optimizer process:
  • Bond ETF Rotation Strategy (BRS) (0% to 100%)
  • BUG Permanent Portfolio Strategy (BUG) (0% to 100%)
  • World Top 4 Strategy (WTOP4) (0% to 100%)
  • Global Sector Rotation Strategy (GSRS) (0% to 100%)
  • Global Market Rotation Strategy (GMRS) (0% to 100%)
  • Maximum Yield Strategy (MYRS) (0% to 100%)
  • NASDAQ 100 Strategy (NAS100) (0% to 100%)
  • Leveraged Gold-Currency Strategy (GLD-USD) (0% to 100%)
  • US Sector Rotation Strategy (USSECT) (0% to 100%)
  • Leveraged Universal Investment Strategy (UISx3) (0% to 100%)
  • US Market Strategy (USMarket) (0% to 100%)
  • Dow 30 Strategy (DOW30) (0% to 100%)
  • Universal Investment Strategy (UIS) (0% to 100%)

Statistics of Max Sharpe Portfolio (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Applying this definition to our asset in some examples:
  • Looking at the total return, or increase in value of 134.3% in the last 5 years of Max Sharpe Portfolio, we see it is relatively larger, thus better in comparison to the benchmark SPY (65.8%)
  • During the last 3 years, the total return, or increase in value is 58.4%, which is larger, thus better than the value of 49.4% from the benchmark.

CAGR:

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Which means for our asset as example:
  • The annual performance (CAGR) over 5 years of Max Sharpe Portfolio is 18.6%, which is larger, thus better compared to the benchmark SPY (10.6%) in the same period.
  • Compared with SPY (14.3%) in the period of the last 3 years, the compounded annual growth rate (CAGR) of 16.6% is higher, thus better.

Volatility:

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Using this definition on our asset we see for example:
  • The 30 days standard deviation over 5 years of Max Sharpe Portfolio is 8.1%, which is lower, thus better compared to the benchmark SPY (13.3%) in the same period.
  • Compared with SPY (12.6%) in the period of the last 3 years, the volatility of 7.6% is lower, thus better.

DownVol:

'Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (14.6%) in the period of the last 5 years, the downside risk of 9% of Max Sharpe Portfolio is lower, thus better.
  • During the last 3 years, the downside risk is 8.6%, which is lower, thus better than the value of 14.3% from the benchmark.

Sharpe:

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Which means for our asset as example:
  • The risk / return profile (Sharpe) over 5 years of Max Sharpe Portfolio is 1.98, which is greater, thus better compared to the benchmark SPY (0.61) in the same period.
  • Compared with SPY (0.94) in the period of the last 3 years, the risk / return profile (Sharpe) of 1.85 is greater, thus better.

Sortino:

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (0.56) in the period of the last 5 years, the downside risk / excess return profile of 1.79 of Max Sharpe Portfolio is higher, thus better.
  • During the last 3 years, the downside risk / excess return profile is 1.63, which is greater, thus better than the value of 0.83 from the benchmark.

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Applying this definition to our asset in some examples:
  • Looking at the Ulcer Index of 1.57 in the last 5 years of Max Sharpe Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (3.99 )
  • Compared with SPY (4.05 ) in the period of the last 3 years, the Downside risk index of 1.58 is lower, thus better.

MaxDD:

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Applying this definition to our asset in some examples:
  • The maximum drop from peak to valley over 5 years of Max Sharpe Portfolio is -6.4 days, which is greater, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Looking at maximum drop from peak to valley in of -6.3 days in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (-19.3 days).

MaxDuration:

'The Maximum Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Applying this definition to our asset in some examples:
  • Looking at the maximum days under water of 83 days in the last 5 years of Max Sharpe Portfolio, we see it is relatively smaller, thus better in comparison to the benchmark SPY (187 days)
  • Looking at maximum days below previous high in of 83 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (139 days).

AveDuration:

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Using this definition on our asset we see for example:
  • The average days under water over 5 years of Max Sharpe Portfolio is 17 days, which is lower, thus better compared to the benchmark SPY (41 days) in the same period.
  • Looking at average days under water in of 20 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (36 days).

Performance of Max Sharpe Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Max Sharpe Portfolio
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Allocations

Returns of Max Sharpe Portfolio (%)

  • "Year" returns in the table above are not equal to the sum of monthly returns due to compounding.
  • Performance results of Max Sharpe Portfolio are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.