The Value of Stop-Losses and Stop-Gains in Enhancing Risk-Adjusted Return

Austin Shelton

University of Arizona

January 5, 2014

Asset allocation strategies which utilize stop-loss and stop-gain rules may dramatically decrease risk and even increase long-term return relative to passive investing. I introduce an asset allocation strategy which shifts portfolio weights based on simplistic stop rules. The two-asset (S&P mutual fund and bond mutual fund) strategy tested from 1990-2012 produces an annual geometric return of 8.45% vs. 7.50% for the underlying S&P 500 Index fund, with 50% less volatility (9.41% annualized standard deviation of return vs. 18.76% for the S&P index fund). The strategy’s strong results are robust to changes in the user-specified parameters, such as the level and number of stop placements. Hence, further development and refinement of asset allocation and trading strategies which incorporate stop-loss and stop-gain rules may be a valuable area of future research.

Number of Pages in PDF File: 19

Keywords: stop-loss, stop-gain, stop loss, stop gain, return, risk, information ratio, asset allocation, alpha, portfolio management, investing, trading, trading rules, trading strategies, mutual funds, active management, passive investing

JEL Classification: G1, G10, G11, G12, C00

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Date posted: June 26, 2013 ; Last revised: January 6, 2014

Suggested Citation

Shelton, Austin, The Value of Stop-Losses and Stop-Gains in Enhancing Risk-Adjusted Return (January 5, 2014). Available at SSRN: http://ssrn.com/abstract=2285222 or http://dx.doi.org/10.2139/ssrn.2285222

Contact Information

Austin Shelton (Contact Author)
University of Arizona ( email )
Tucson, AZ 85721
United States
520-203-1702 (Phone)
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