Refining Our Optimized Portfolio With Western Refining Inc.

| About: Western Refining, (WNR)

The search continues in this article for stocks that will improve the model portfolio I presented in my last article entitled Power Optimization: There's Something About Wal-Mart.

The optimized portfolio (blue bars) that was presented in that article grew in value as follows:

The above performance had the advantage of investing from a low on November 2, 2008. If you had invested from a high on Nov. 7, 2009, the portfolio would have looked like this.

In the two figures above we use starting portfolio values of $100 so it is easy to translate to percentage growth. The blue bars use the hybrid rebalancing process on an optimized portfolio, while the green bars use a buy-and-hold strategy on an equal-weights portfolio. Taxes, commissions, and the use of a risk-free proxy are not included in the calculations. Price data has been sourced from Seeking Alpha on a dividend-adjusted basis. The results are obtained by going back in time to use only the data available as at each review point, calculating the optimal weights, then going forward to compare the performance between the optimized and equal-weights portfolios. The portfolios are assumed to be 100% invested throughout.

The hybrid rebalancing process is designed to take advantage of upward movements in the market and reduce volatility in times when the market comes down. The two scenarios above (while not serving as a rigorous proof) suggest that the rebalancing procedure has performed in line with expectations.

Now let's add another stock to our model portfolio --- Western Refining Inc. (NYSE:WNR) which is an independent crude oil refiner and marketer of refined products and which also operates service stations and convenience stores.

For easy reference the other stocks in the model portfolio are listed at the bottom of this article. When Western Refining Inc. is added to the model portfolio, the performance over the years had you started your portfolio on 2 November 2008 is as follows:

And had you invested from a high on 7 Nov 2009, the portfolio would have looked like this:

Once again, the hybrid rebalancing strategy has out-performed the equal weights portfolio at both a low entry point and a high entry point. The choice of including Western Refining Inc. is based on the advantage it provides not just in terms of correlation but its contribution to overall portfolio volatility and return. See my article entitled Optimization Mechanics: It's Not Just Correlation

Having said that, note the low correlation between Western Refining Inc and the rest of the portfolio:


Western Refining Inc. has a volatility that not every investor can stomach but for our high volatility model portfolio using the hybrid rebalancing strategy, it added some value. In the next few articles, I will continue to build on our existing high volatility model portfolio with the twin goals of taming volatility while achieving a superior return.

Appendix: Stocks in the High-Volatility Model Portfolio (stocks in Italics are sourced from the OxStones Investment Club:

Alumina Ltd (AWC), Aluminum Corp Of China Ltd (ACH), Arch Coal (ACI), Archer Daniels Midland Company (ADM), CEMEX, S.A.B. de C.V. (CX), CNH Global NV (CNH), Cameco Corp (CCJ), Central European Dist Corp (CEDC), Central European Media Ent Ltd (CETV), China Life Insurance Co. Ltd (LFC), Coeur d'Alene Mines Corp (CDE), Corning (GLW), DRDGOLD Ltd (DRD), Fibria Celulose SA (FBR), France Telecom (FTE), GOL Linhas Areas Inteligentes SA (GOL), Harmony Gold Mining Co. Ltd (HMY), Impala Platinum Holdings Ltd (IMPUY.PK), Kinross Gold Corp (KGC), Net 1 Ueps Technologies (UEPS), Newmont Mining Corp (NEM), Nokia Corp (NOK), Oi SA (OIBR), Owens-Illinois (OI), Petroleo Brazileiro (PBR), Pilgrim's Pride Corp (PPC), Repsol Ypf SA (REPYY.PK), Telefonica SA (TEF),Teva Pharmaceutical Ind Ltd (TEVA), Total SA (TOT), Universal Corporation (UVV), Veolia Environnement SA (VE), Wal-Mart Stores (NYSE:WMT), Yahoo! (YHOO)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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