Dynamic Portfolio Management Strategies: A Framework for Historical Analysis

Abstract

The performance of dynamic trading and investment strategies can be difficult to predict. Although not without its problems, analysis of the historical performance of a strategy can provide valuable insight into its general risk and return properties. Furthermore, historical analysis allows one to compare variations of a strategy and examine the impact of various parameter choices and implementation rules. Dynamic strategy applications in three areas are considered, namely derivatives, asset allocation and equity factor portfolios.

Firstly, the analysis of a strategy involving single-stock derivatives is examined in which call options on certain constituents of an index portfolio are sold as an alternative method of under-weighting the underlying.

Secondly, the historical performance of an optimization-based asset allocation strategy is considered. The assumed aim of the strategy is to outperform a benchmark of CPI 5 via dynamic trading in a portfolio of domestic equities, bonds, property and cash, as well as international equities and bonds.

Finally, the effects of portfolio construction on factor performance are studied via an historical analysis in which portfolios corresponding to a selection of fundamental factors are managed according to a range of weighting schemes, rebalance frequencies and portfolio sizes.

Keywords: Dynamic trading strategies, backtesting, call options, asset allocation, factor investing

JEL Classification: C01, C02, C21, C22, C31, C32, C51, C52, C53, C61, G12, G13, G14