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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 254128  
Subject: Blending at a Whole New Level Updated Date: 12/13/2012 12:43 PM
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Back in July of 2008 some of you may recall that I did extensive backtesting to come up with a better solution than using Excel's Solver. The idea was simple: Use the running balance of all Gold, Silver, and Bronze Value Line screens to find a measure that is more predictive of higher, and safer, returns than simply a dart board. The conclusion of all that testing was:

1. Optimal to employ a simple timing system on top to limit downside risk during bearish periods -- I suggested the Nasdaq NH-NL -- which from those posts till now has become quite well known on this forum. For the sake of my backtests today I'm using this to go wholly into Cash during the bearish periods, since my inclination and practice is this.

2. Sharpe/GSD is an excellent measure for choosing the optimal blend.

These tests are built on the premise of holding FIVE screens with each of them invested in FOUR stocks, for a total hold of TWENTY stock positions.

Original Research Links:

Blending at a Whole New Level - 7/22/2008
http://boards.fool.com/blending-at-a-whole-new-level-2683434...

The Best Measure for the Best Blend - 11/16/2007
http://boards.fool.com/the-best-measure-for-the-best-blend-2...

Optimizing Blends with Sharpe/(GSD^x) - 11/17/2007
http://boards.fool.com/optimizing-blends-with-sharpegsdx-261...

Since I first shared about using Sharpe/GSD in the middle of November 2007, these tests are based on a backtest from 1/1/2008 to the present. In other words, I am seeking to validate that the method outlined back then ended up being a good one for selecting the screens to invest in to create a blend.

Indexes to Compare To

These indexes are being tested over the same time period and will serve as a benchmark for the blends that follow.

Symbol                Name                 CAGR    GSD   Sharpe   DDD3    BBW   Drawdown
^BTK Amex Biotech Index 14.90% 34.37 0.56 6.78% 2.28 -38.89%
^RLX Retail - Rlx 10.43% 35.95 0.46 9.09% 1.19 -49.68%
^IIX Amex Internet 7.68% 34.39 0.38 9.78% 0.84 -54.44%
^PSE Tech: Pse Tech 6.39% 29.66 0.37 10.21% 0.67 -45.04%
^NDX Nasdaq 100 Index 5.68% 31.31 0.3 10.87% 0.56 -49.56%
^XAL Amex Airline Index 5.37% 67.54 0.32 15.30% 0.37 -67.10%
^SML S&p 600 Small Cap 3.74% 37.29 0.25 12.61% 0.32 -54.79%
^CMR Amex Ms Consumer Index 3.18% 21.83 0.23 8.63% 0.4 -41.13%
^IXIC Nasdaq Composite 3.07% 31.63 0.22 11.36% 0.29 -51.43%
^XCI Amex Computer 2.99% 30.91 0.21 10.32% 0.31 -50.22%
^HCX S&p Healthcare Index 2.74% 22.94 0.2 8.14% 0.36 -40.32%
^MXY Amex Mexico Index 2.48% 38.39 0.21 15.93% 0.17 -64.61%
^DRG Pharmaceutical 2.36% 22.16 0.18 6.82% 0.36 -38.65%
^MSH Morgan Stanley Technology Index 2.35% 34.18 0.2 11.62% 0.22 -53.74%
^XNG Energy - Natural Gas 2.30% 47.88 0.26 14.40% 0.17 -60.69%
^RUT Russell 2000 2.11% 39.52 0.21 12.88% 0.18 -55.03%
^XTC Telecommunications 1.58% 31.31 0.17 10.81% 0.16 -52.82%
^CYC Amex Ms Cyclical Index 0.81% 42.02 0.18 18.38% 0.05 -72.29%
^DJI Dow Jones Industrial Average 0.32% 27.15 0.11 12.07% 0.03 -49.86%
^RUA Russell 3000 0.23% 30.99 0.12 13.05% 0.02 -53.47%
^DJA Dow 65 Composite 0.14% 28.34 0.12 12.74% 0.01 -51.95%
^RUI Russell 1000 0.07% 31.4 0.12 13.07% 0.01 -53.41%
^GSPC S&p 500 -0.28% 30.24 0.1 12.97% -0.02 -53.27%
^OEX S&p 100 -0.78% 28.98 0.07 12.50% -0.07 -52.36%
^SOXX Phlx Semiconductor Sector -1.12% 42.43 0.14 13.70% -0.09 -59.37%
^XII Institutional Ndx -1.26% 28.46 0.05 12.48% -0.11 -51.22%
^XAU Phlx Gold And Silver Sector -2.24% 58.66 0.16 14.11% -0.17 -68.15%
^NYA Nyse Composite -2.79% 32.34 0.02 14.24% -0.21 -56.23%
^VLIC Value Line -3.50% 39.93 0.05 16.62% -0.23 -64.73%
^UTY Phlx Utility Sector -3.81% 24.62 -0.08 11.30% -0.37 -47.63%
^HKX Amex Hong Kong 30 Index -4.17% 33.09 -0.02 14.87% -0.31 -59.64%
^XOI Energy - Oil -4.60% 42.8 0.03 14.02% -0.35 -53.30%
^JPN Amex Japan Index -9.41% 33.01 -0.22 14.32% -0.71 -53.55%
^BIX Finance: S&p Bank -10.45% 77 0.08 21.89% -0.52 -83.31%
^BKX Phlx - Kbw Bank Index -10.62% 72.77 0.06 22.34% -0.52 -80.63%
^IUX Finance: Insurance -11.03% 53.59 -0.07 21.89% -0.55 -78.64%
^XBD Finance: Broker -15.48% 61.35 -0.11 20.56% -0.82 -75.00%

The blends that follow are all sorted based on the CAGR. Amazingly, the absolute best measure ends up being the exact same one that was determined to be best back in 2007 and 2008. A very nice confirmation of all the work that went into those posts back then.

         Measure           Sort   CAGR    GSD   Sharpe  DDD3    BBW   Drawdown
Sharpe/(GSD^x) DESC 8.85% 16.69 0.68 3.29% 2.84 -24.90%
Treynor/(Beta^x) DESC 8.70% 17.23 0.64 4.64% 2.01 -27.13%
Treynor/(GSD^x) DESC 6.85% 14.67 0.58 3.58% 2.03 -25.22%
Best of Both Worlds DESC 7.40% 16.48 0.57 4.11% 1.92 -27.67%
Calmar DESC 7.01% 16.52 0.57 5.22% 1.45 -26.79%
Ulcer Performance Index DESC 7.09% 16.99 0.55 5.89% 1.31 -28.59%
Sortino DESC 7.32% 18.22 0.55 4.72% 1.66 -27.10%
Jensen DESC 8.04% 19.44 0.54 6.13% 1.42 -31.10%
Sharpe DESC 6.68% 18.1 0.51 5.69% 1.27 -28.05%
Treynor DESC 6.62% 16.64 0.51 5.00% 1.43 -27.82%
CAGR/(UPI^x) ASC 6.23% 17.24 0.51 4.21% 1.59 -23.28%
Alpha DESC 6.91% 19.23 0.49 6.91% 1.09 -31.08%
CAGR/(GSD^x) DESC 6.33% 17.01 0.49 5.41% 1.26 -27.31%
Double Downside Deviation ASC 5.14% 14.95 0.49 4.25% 1.29 -26.20%
CAGR/(UI^x) ASC 6.66% 23.47 0.44 4.14% 1.69 -28.50%
Correlation ASC 5.59% 18.57 0.44 3.23% 1.83 -24.31%
GSD DESC 6.30% 26.7 0.43 5.23% 1.29 -31.30%
CAGR/(SF^x) DESC 4.67% 15.73 0.42 5.85% 0.87 -29.07%
Sleep Ratio ASC 4.38% 15.4 0.42 4.16% 1.13 -20.91%
CAGR/(UI^x) DESC 4.76% 15.49 0.42 6.14% 0.84 -29.33%
Sleep Ratio DESC 5.02% 24.67 0.41 4.79% 1.11 -29.49%
Downside Deviation DESC 5.03% 25.97 0.39 6.24% 0.87 -34.46%
Ulcer Performance Index ASC 4.99% 21.84 0.36 3.94% 1.33 -27.36%
Treynor/(Beta^x) ASC 5.42% 21.44 0.36 3.65% 1.56 -27.76%
Sortino ASC 4.05% 21.62 0.32 3.90% 1.09 -27.36%
Upside Potential ASC 3.28% 14.95 0.32 2.89% 1.18 -16.78%
Calmar ASC 4.25% 21.39 0.32 4.11% 1.09 -27.36%
Sharpe ASC 4.05% 21.62 0.32 3.90% 1.09 -27.36%
Ulcer Index ASC 2.37% 14.49 0.31 4.97% 0.52 -22.93%
Treynor ASC 3.92% 21.21 0.31 4.53% 0.92 -27.20%
GSD Ratio ASC 2.76% 18.73 0.31 3.90% 0.74 -25.85%
GSD Ratio DESC 2.78% 17.63 0.31 5.33% 0.56 -26.30%
CAGR/(UPI^x) DESC 3.66% 22.51 0.3 5.93% 0.66 -30.71%
Double Downside Deviation DESC 3.19% 23.71 0.29 5.78% 0.59 -32.95%
CAGR/(GSD^x) ASC 3.84% 21.2 0.29 3.74% 1.08 -27.53%
GSD ASC 2.59% 14.23 0.28 3.24% 0.84 -17.53%
Upside Potential DESC 2.35% 25.43 0.27 5.94% 0.42 -32.31%
Sharpe/(GSD^x) ASC 3.37% 20.85 0.27 4.13% 0.86 -29.17%
Upside Potential Ratio DESC 2.42% 18.23 0.26 6.45% 0.41 -28.74%
Beta DESC 2.03% 26.72 0.26 7.77% 0.28 -36.69%
Correlation DESC 2.16% 17.48 0.25 5.54% 0.42 -23.08%
Downside Deviation ASC 1.85% 14.73 0.23 3.77% 0.52 -18.83%
CAGR/(SF^x) ASC 2.65% 21.34 0.22 4.67% 0.6 -28.50%
Normalized Trough Count ASC 1.69% 15.37 0.21 4.66% 0.39 -22.89%
Best of Both Worlds ASC 1.86% 21.06 0.21 4.80% 0.41 -28.50%
Jensen ASC 1.61% 22.2 0.2 5.30% 0.33 -29.04%
Alpha ASC 1.90% 21.94 0.2 5.21% 0.39 -28.77%
Treynor/(GSD^x) ASC 2.16% 20.4 0.2 4.83% 0.48 -29.06%
Upside Potential Ratio ASC 1.55% 19.92 0.2 4.51% 0.36 -27.42%
Ulcer Index DESC 0.33% 23.41 0.17 5.92% 0.06 -30.54%
Normalized Trough Count DESC -1.41% 25.82 0.11 8.18% -0.19 -32.67%
Beta ASC 0.29% 14.98 0.09 4.49% 0.07 -23.43%
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