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:

Statistics of Max Sharpe Portfolio (YTD)

What do these metrics mean? Show Details

TotalReturn:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Applying this definition to our asset in some examples:
  • Looking at the total return, or increase in value of 107.6% in the last 5 years of Max Sharpe Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (68%)
  • Looking at total return in of 56.2% in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (53.9%).

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (10.9%) in the period of the last 5 years, the compounded annual growth rate (CAGR) of 15.7% of Max Sharpe Portfolio is larger, thus better.
  • Compared with SPY (15.5%) in the period of the last 3 years, the annual performance (CAGR) of 16% is greater, thus better.

Volatility:

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Using this definition on our asset we see for example:
  • The volatility over 5 years of Max Sharpe Portfolio is 6.7%, which is lower, thus better compared to the benchmark SPY (13.2%) in the same period.
  • Looking at volatility in of 7% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (12.6%).

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.'

Which means for our asset as example:
  • Looking at the downside risk of 7.7% in the last 5 years of Max Sharpe Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (14.6%)
  • During the last 3 years, the downside risk is 8.4%, which is smaller, thus better than the value of 14.2% from the benchmark.

Sharpe:

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (0.64) in the period of the last 5 years, the Sharpe Ratio of 1.98 of Max Sharpe Portfolio is larger, thus better.
  • Compared with SPY (1.03) in the period of the last 3 years, the Sharpe Ratio of 1.93 is larger, 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:
  • The excess return divided by the downside deviation over 5 years of Max Sharpe Portfolio is 1.71, which is higher, thus better compared to the benchmark SPY (0.58) in the same period.
  • During the last 3 years, the ratio of annual return and downside deviation is 1.62, which is larger, thus better than the value of 0.91 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.'

Which means for our asset as example:
  • Looking at the Downside risk index of 1.33 in the last 5 years of Max Sharpe Portfolio, we see it is relatively lower, thus worse in comparison to the benchmark SPY (3.93 )
  • Looking at Ulcer Ratio in of 1.43 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (3.95 ).

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Using this definition on our asset we see for example:
  • The maximum drop from peak to valley over 5 years of Max Sharpe Portfolio is -5.3 days, which is higher, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum drop from peak to valley of -5.3 days is larger, thus better.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs) in days.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (187 days) in the period of the last 5 years, the maximum days below previous high of 129 days of Max Sharpe Portfolio is lower, thus better.
  • Compared with SPY (131 days) in the period of the last 3 years, the maximum time in days below previous high water mark of 129 days is lower, thus better.

AveDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. 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.'

Which means for our asset as example:
  • Looking at the average days under water of 20 days in the last 5 years of Max Sharpe Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (37 days)
  • Compared with SPY (30 days) in the period of the last 3 years, the average days below previous high of 22 days is lower, thus better.

Performance of Max Sharpe Portfolio (YTD)

Allocations of Max Sharpe Portfolio
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Allocations

Returns of Max Sharpe Portfolio (%)

Annual returns of Max Sharpe Portfolio do not equal the sum of monthly returns due to compounding.
Performance results of Max Sharpe Portfolio are hypothetical, do not account for slippage, execution cost and taxes, and based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.