study additional features of the UM Super Combo system using Portfolio123’s Screen Engine.

study additional features of the UM Super Combo system using Portfolio123’s Screen Engine.

INSTRUCTIONS

HOMEWORK 4

•    Form groups of 2 or 3 students. Choose 2 questions among questions 1,2, and 3, and 3 additional questions among questions 4 to 14.
•    To make sure you get full credit for your homework:
o    All your answers must demonstrate sufficient effort.
o    Include all your answers in one Excel file or one Word file.
o    Show your work. Numerical answers without accompanying calculations will not be considered.
o    Make sure your Excel/Word file is well organized, so the grader can clearly read all your answers.
•    You can access the UM Super Combo ranking system of Lecture 4 using the following link: https://www.portfolio123.com/app/ranking-system/250759

QUESTIONS

1)    The purpose of this exercise is to study additional features of the UM Super Combo system using Portfolio123’s Screen Engine. Backtest the performance of an

equally-weighted portfolio containing the top 100 stocks in the Russell 3000 according to the UM Super Combo system. The portfolio will be rebalanced every four

months. To do that:  Click on Screen-> New Stock Screen.
Then click on Main Settings and choose the following: Universe=PRussell3000 (NEW) Benchmark=Russell3000 w/div
Method = Long
Ranking = Ranking System -> Choose the UM Super Combo system from Lecture 4. Max No. Stocks =100
Then click on Backtest and choose: Price=Next Open
Rank Tolerance = 0 Max Pos = 0 Carry Cost=0       Slippage   =  0     Long Weight =100
Start Date – End Date= MAX Rebalance Frequency = 3 months
Save this screen as UM Super Combo Top 100, for example.
a)    Click on Run Backtest to obtain the results of the backtest. Copy-paste the resulting graphs and answer:
i)    What is the annualized return of the Top 100 portfolio and of the Russell 3000?
ii)    How many (consecutive, non-overlapping) 3-month periods are there from Jan 1999 to now? What is the 3-month Hit Rate of the Top 100 portfolio? That is, in how

many 3-month periods does the Top100 beat the Russell 3000 Index (positive Excess% column)?
Hint: Download to Excel and use the function COUNTIF
iii)    What is the average Turnover of the Top 100 portfolio (3-month and annual)?
Note that Portfolio123 only counts stocks entering or exiting the portfolio, and ignores rebalances back to equal weights. Thus, Portfolio123’s turnover calculation

underestimates the true turnover. However, the turnover coming from rebalances back to equal weights is of second order compared to the turnover coming from stocks

entering or exiting the portfolio, so turnover is not underestimated by too much.

b)    The results in a) do not incorporate transaction costs. A quick and dirty way to do so is to fix a Slippage parameter in Portfolio123. This incorporates

transaction costs by assuming that stocks purchases and sales are done at worse prices than the historical record: buy at higher price, sell at lower price. Repeat the

backtest choosing Slippage=0.45%, which is the average all-in transaction cost per trade for institutional investors. This is a quick and dirty approach because true

slippage depends on how much money one is actually trading. Bigger trades move prices against you more. And, and before, Portfolio123’s Slippage only accounts for

stocks entering or exiting the portfolio, and ignores rebalances back to equal weights. Run Backtest again and answer:
What is the annualized return of the Top 100 portfolio incorporating transaction costs?
c)    The backtest in a) is done using Russell 3000 stocks. Repeat item a (sub-items i, ii, and iii) using large caps only, that is using the Russell 1000 as

Universe (and Russell 1000 with dividends as benchmark).
d)    The backtest in a) is done using Russell 3000 stocks. Repeat item a (sub-items i, ii, and iii) using small caps only, that is using the Russell 2000 as

Universe (and Russell 2000 with dividends as benchmark).
e)    Based on your findings above, answer: Do the quantitative signals in UM Super Combo work better for large cap or small cap stocks?

2)    The purpose of this exercise is to examine different ways to combine signals.
Consider the Value and Quality Combos in Lecture 4 Slides.
a)    Usual Ranking combo seen in class. Create a Value and Quality combo with weights 50% in Value and 50% in Quality. Test the performance of the ranking in the

PRussell 3000 (NEW) universe, with 10 buckets, 3-month rebalancing, MAX time period, minimum price=3, All Sectors. Answer: what is the average return (CAGR/geometric

average) of the top 10% bucket?
Note: Save the time series of top 10% portfolio returns for use in item e.
b)    Separate portfolios combo. Repeat a) for two separate combos, one at a time: Value Combo and Quality Combo. Create a portfolio that is invests 50% in the top

10% bucket of the Value Combo and invests 50% in the top 10% bucket of the Quality Combo. The combined portfolio is rebalanced back to these weights every 91 days.

Answer: what is the average return (CAGR/geometric average) of the combined portfolio?
Note: Save the time series of top 10% portfolio returns for use in item e.
c)    Sequential Screening I. Now you will first screen for the stocks in the bottom 50% using Quality, and then choose the top 20% of these stocks according to the

Value Combo. To do this you must save the Value and Quality combos separately with names you will remember, such as Value Combo and Quality Combo. Now go to Screen-

>New Screen-> . In Main Settings, choose the PRussell3000 (NEW) as your Universe, Method=Long, and Ranking=No Ranking. Then click on Rules and add the following rules

(the order matters!):
i)    Rating(“Quality Combo”)>50
ii)    Rating(“Value Combo”)>80
Then click on Backtest, and choose Slippage=0 and Carry cost=0, and MAX time period, and 3 month rebalancing. Answer: what is the average return (CAGR/geometric

average) of the screened portfolio? Note: Save the time series of top 10% portfolio returns for use in item e.
d)    Sequential Screening II: Repeat c) but change the order of the rules:
i)    Rating(“Value Combo”)>50
ii)    Rating(“Quality Combo”)>80
Note: Save the time series of top 10% portfolio returns for use in item e.
e)    What are the correlations between the returns of the 4 Value/Quality portfolios in a), b), c), and d)?

f)    Will the 4 Value/Quality portfolios in a), b), c), and d) necessarily have the same (or at least very similar)

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