- Why IFCM
- Market Data
- For Business
To build a portfolio the US Dow Jones (DJI) components were used. The instrument is created by opening opposite positions on competing companies stocks. The shares with the best risk/return ratio (long position) are compared to the least attractive ones of the rivals (short position). Portfolio weights are optimized in order to reduce the correlation with the market indices (hedging) which makes it possible to limit economic risks of U.S. (recessions, crises, speculative market crashes etc.).
The following companies were given the largest weights in the portfolio:
More than 80% of the portfolio capital accrues to the U.S. Dow Jones index components. The systematic risks caused by recession, stock exchange panic or economic slowdown are reduced while comparing the portfolio with DJI index. The chart below illustrates the increase of portfolio and index cumulative yields.
In 2011 several American indices lost few percent in a week after the U.S. credit rating was reduced from the AAA to AA+. The Dow Jones index was no exception showing the record slump since 2008. Investors that invested in the index in 2009 (the time when the U.S. economy began its recovery) lost almost all their cumulative yield, 17% out of 20%. At the same time, the index portfolio continued to grow with the 20% yield in the period of 2009-2011. Despite the fact that portfolio weights are based on the historical data of 2009-2014, its yield is steadily growing in 2015 (blue line on the chart).