Stock-Trak portfolio starts with $1,000,000 of pretend cash in which investor must have positions in at least five individual stocks at all times and cannot have more than 25% of investor’s money in any stock. Day trade or any other type of security other than individual stocks is not allowed. This report is to evaluate Stock-Trak performance through 8 weeks period from 31 August, 2007 to 26 Oct, 2007.
This Stock-Trak includes 5 individual stocks from 5 different industries at all time which enable diversification. Every week Covariance Matrix and Solver function is run to find out the optimal portfolio weight. Trading is executed whenever it is to increase diversification which leads to lower portfolio standard deviation or higher Sharp ratio. However, based on ranking every week, this portfolio is not really successfully against other peers in term of portfolio return which average ranking is 25.
The market index S;P500 is chosen as benchmark since all individual stocks in this Stock-Trak portfolio are in US market and s a market-value weighted index – each stock’s weight in the index is proportionate to its market value. Now we go to thorough analysis of this Stock-Trak portfolio’s performance. The regression has significant value p ; . 05 mean regression is statistically significant, we conclude that portfolio return and market return has significant relationship. Adjust R square equals 0.
605636 means that 60. 56% variance in Stock-Trak portfolio return is explained by market portfolio return which is statistically high number. In conclusion, the Stock-Trak portfolio is underperformed market index S;P500 because Stock-Trak portfolio has lower Shape Raio, lower Treynor Ratio. Moreover, the Portfolio also underperformed the other passive benchmark R2000. One possible reason is because the Stock-Trak portfolio has high unsystematic risk which should be eliminated by diversifying.
The other reason is because the underlying method use for trading is trading strategy, investor used momentum to predict the stock price in short-term. Instead of focusing on diversification, investor tried to out-perform the market by momentum and analysis skills toward company information. However, based on weak-form of market efficiency, this method is useless since all past information is already reflected in current stock price. Therefore, to improve performance, investor should try to more diversify the portfolio.