Momentum Optimization Analysis Of Stock Portfolio

Includes: IEF, VTI
by: Lowell Herr

If you have not read the QQP analysis of this set of stocks, do so before reading this blog. Here is the link to the Quantext Portfolio Planning analysis. While the QPP analysis provides a probability projection of what one might expect over the next six to twelve months, the following analysis shows where the current portfolio is positioned with respect to an optimized portfolio. In other words, we are looking at the Return/Risk ratio of the current portfolio and comparing it with an optimized portfolio.

In the first Efficient Frontier graph I use the 17% allocated to IEF and in the second EF graph, I move that 17% to VTI, or a total U.S. Equities index ETF. Keep in mind that this is not an exact replication of this stock portfolio as there were more than 40 stocks in the portfolio and my software is limited to handling 40 stocks. Even with a fast computer, it takes between 10 and 15 minutes to run out one analysis due to all the calculations. Nevertheless, this analysis will give interested readers an idea of Return/Risk, stock rankings, and Buy-Hold-Sell recommendations for a portfolio loaded with individual stocks. Another reason for substituting VTI for IEF is to see how the stocks rank when compared to a broad market ETF.

Efficient Frontier with IEF: In the following EF graph only the optimized portfolio shows as the current portfolio Return/Risk ratio value is so far into the southwest quadrant as to not show up on the graph. This is due to holding such a high percentage in IEF. In the next EF graph we replace IEF with VTI and the current portfolio Return/Risk ratio is visible.

Click to enlarge

Efficient Frontier with VTI: When IEF is replaced with VTI the Return/Risk coordinates move up the EF graph to where it nearly lies on top of the optimized portfolio. Very little tweaking is needed when one sees these results.

Click to enlarge

Rankings with VTI: The following ranking includes VTI in the mix. Note that it comes in at the #13 spot or very close to the first quadrant. As mentioned before, I wanted to see what a portfolio would look like with VTI in the mix instead of IEF. In addition I wanted to see how the individual stocks stacked up against VTI. This table provides that ranking information.

With VTI as one of the major holdings, this stock-oriented portfolio looks quite good from both a QPP analysis and OM perspective.

Click to enlarge

Buy-Hold-Sell Recommendations: If one restricts the buy screen to number 7 or lower, there are not too many buying opportunities showing up in this portfolio. What happened is that the market drop on Friday took the price of many investments below their 13-Day Exponential Moving Average. While this one-day move certainly does not indicate a general sell signal, it does place many securities on the Hold zone.

Click to enlarge

Disclosure: None