More real work done by Herb Haynes ?
In Parts 5 and 6 of this series of posts, we looked at the relationship between the Projection look-back period (L1) and the Convolution look-back period (C1) – keeping all other parameters constant. In Part 3 we described the Convolution parameter and the fact that it comes in two parts, a look-back period (C1), for purposes of calculating the slope and intercept of the linear regression line, and an offset period (O1) to determine at what point on the line the Convolution value will be measured.
In this post we look at the relationship between C1 and O1 in terms of their impacts on system performance. Again, in order to determine these relationships, we must keep all other system parameters constant. Thus, all parameter values used in previous tests remain unchanged – but, specifically, of the parameters we have already looked at, we keep the Projection look-back period (L1) fixed at 100 days and we keep the SHY filter turned off.
As before, let’s look first at total returns as we vary C1 between 20 and 100 days and O1 between -20 and -100 days:
As we would expect, the value in the highlighted cell (L1=100, C1=90, O1=-50) is the same (234.2%) as the value reported in Part 6 of the study. Here, we get confirmation that -50 is a “robust” value for the convolution offset parameter – in fact, combined with L1=100 and C1=50, results in “optimal” performance (245.1% maximum total returns) – but, we’ll stick with the highlighted cell for focus.
Obviously, CAGR values reflect the total return rankings in terms of performance:
Now, let’s take a look at portfolio volatility:
Again, we see that the highlighted cell falls in a compromise “moderate” position – not in the highest percentile yet not in the lowest percentile ranges.
So, let’s look at the return/risk balance through the Sharpe Ratio:
…. Looking pretty “robust”.
As in previous posts we can move on to look at draw-downs:
Our highlighted cell remains in the top percentile green areas with DD ~15% – but there are lower DDs towards the bottom right hand corner of the map.
So, let’s balance returns and maximum DD by looking at the MAR ratio:
Here we see the penalty paid if we want smaller DDs – lower total returns/CAGR (top 2 figures).
The following HM shows the calculated number of trades in the above tests:
Ok – so we “cheated” a little when we fixed the value of O1=-50 in Parts 5 and 6 – but, had we chosen something else (e.g., O1=-20), we would have arrived at the same point at this stage of our analysis.
These tests just confirm/justify our choice of -50 for the offset parameter.
All these parameters (L1, P1, C1 and O1) can be assigned/adjusted in the MENU sheet of the LRPC workbook. Although P1 is a parameter that could be changed, we keep this constant at 20 days since this is logical and appropriate for a monthly review schedule.
Now that we have taken a look at all the Projection and Convolution (PC) parameters we can select values that we might favor and take a look at the impact of changing the number of assets to be included in the portfolio. This will be the subject of our next post. Remember, all our tests to date assume no limit to the maximum number of assets that might qualify for inclusion in the portfolio (10 for the Rutherford list) – subject to the positive P-C value requirement.
As usual, downloadable PDF file at https://www.dropbox.com/sh/ix9tocyjyf4ycl3/AACoRWSYilTa4Eu6sUi60GI3a?dl=0
Herb and David