Building and Analyzing an Investment Portfolio that Outperforms the Market

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Financial company, IFC Markets, recently presented a revolutionary tool for portfolio analysis and trading called GeWorko method which opens new horizons for individual investors, hedge funds, banks and other financial institutions. Please, click on the link to see the video (http://www.youtube.com/embed/-NSAR3JVwbk) to see how elegantly it is done.

PCI portfolio-GeWorko method

PCI GeWorko

It is known that modern portfolio theory assumes considerable benefits from diversification. Building a portfolio provides an opportunity to escape from non-systematic risks of having financial losses. GeWorko method (http://geworko.com) is a practical implementation of modern portfolio theory, which can be applied in the trading analytical platform NetTradeX. The method allows for the construction of any combination of assets. Using this method it is possible to have personal investment solutions in terms of creating personal composite instruments (PCIs).

In March 2013, one of the most well-known stock market indices, the Dow Jones Industrial Average, managed to recover after the global financial crisis (see Chart 1), reaching the pre-crisis peak of autumn 2007- above 14000 points. Therefore, it took four long years to regain the positions lost in 2008 and 2009.

GeWorko method gives an opportunity to find portfolio of shares, which will be able to protect potential investments. Six stocks, showing quite good dynamics in recent years have been selected from the composition of DJIA index. For presenting an absolute flexibility of the method, random weights have been assigned to each stock in the overall structure. The 6 stocks, which are part of Dow Jones index, were selected as an example for analysis perspective only, and have no intention of promoting (giving financial advice) particular stocks or portfolio itself.

1.    Walt Disney (20%)
2.    Home Depot (20%)
3.    Honeywell International (15%)
4.    International Business Machines (15%)
5.    Coca-Cola (10%)
6.    McDonald’s (20%)

With the PCI tool set, which is integrated into the NetTradeX platform, a portfolio, consisting of the six securities with specified weights and total current value of, i.e. 10000 USD, was created. Chart 2 shows the dynamics of the portfolio performance over the last few years. Here the first conclusions can be drawn. First, the portfolio’s value fell by 40% during the crisis, slightly less than the index. Second, the portfolio managed to reestablish its value in only one year instead of four. Finally, in the post-crisis period the portfolio gained more than 170%.

The chart of the stock portfolio confirms the assumption of a higher return. Accordingly, the created portfolio could really outperform the market. But many more findings are made when the method is used on two portfolios at a time.

Note: According to the simple concept of GeWorko method, one portfolio can be exchanged with another, by simultaneously selling one portfolio and purchasing another one, which, in mathematical terms, is the division of one portfolio by another (or one chart by another). The division of the newly created stock portfolio has been performed against the “Dow Jones” portfolio, which was recalculated to have current investment value of 10000 USD (recalculation was automatically performed by the platform).

According to Chart 3, the portfolio has been beating the market systematically at least since 2006. The relative value charts for each of the six stocks can also be built, but none of the charts gives as "smooth" growing curve (which is an ideal mechanism for investment), as the chart of the stock portfolio does. In addition, "draw downs" or protracted periods of side movement may be observed on those charts.

GeWorko method and PCI toolset result in a smooth growing curve of the relative value of the portfolio, which has been effective for six years even without algorithmic optimization of portfolio structure and re-balancing! Analysis of returns and standard deviations confirmed the findings quantitatively. The realized return of the portfolio significantly exceeded the return of the index with almost the same level of risk. Applying this relatively simple strategy of taking long position on the portfolio and short position on the index, one can be found ahead of the market!

GeWorko method allows constructing an enormous number of portfolios from various assets. The portfolios may vary from the simple to really complex ones. In addition, the method allows investors to apply popular investment strategies of active portfolio management. In combination with the analysis of macroeconomic factors, issuers and technical approach, the method opens entirely new horizons: it is even difficult to imagine how many new trading opportunities can be found! Now it is already possible to trade and analyze personal portfolios or composite instruments, created by using NetTradeX trading platform.

All charts are available on this link: http://www.ifcmarkets.com/en/portfolio-trading/building-and-analysis-of-stock-portfolios-with-geworko-method

About IFC Markets:
IFC Markets is a brokerage company providing Forex (Foreign Exchange Market) and CFD (contracts for difference) trading and associated services for both individual and corporate clients. http://www.ifcmarkets.com

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Anton Rumyantsev

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