Ride the Right Horse: a Systematic Trend Strategy for Superior Return Using Portfolio Utility Optimization
This paper proposes an automated momentum-based portfolio optimization strategy for trading liquid U.S. equities with superior risk-adjusted performance.
What it examines
Researchers observe market concentration and propose a systematic trend-following strategy to identify winning stocks. The study utilizes historical momentum, risk adjustment, and portfolio optimization within a mean-variance framework to achieve superior risk-adjusted returns compared to benchmarks.
What it concludes
The strategy delivers superior risk-adjusted returns with controlled drawdowns. Future improvements include better profit-taking methods, refined return estimates, and long/short portfolio adjustments. Applications include systematic trading, active portfolio management, and mid-frequency trading strategies, offering enhanced risk management and performance.
Evidence objects
Researchers present a trend-following strategy leveraging utility optimization to trade U.S. equities, dynamically rebalancing with mean-variance methods to achieve superior risk-adjusted performance, boosting $$\text{Sharpe}$$, $$\text{Sortino}$$, and Calmar ratios across benchmarks.
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The study integrates simple momentum signals with advanced convex optimization, novel risk parameter selection, and integer-based portfolio translation, while employing exponential-weighted returns and Ledoit-Wolf shrinkage for refined covariance matrix estimation.
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Surprisingly, the research finds that conventional profit-taking rules might effectively hinder returns by missing market days, prompting calls for further exploration of market regime shifts and enhancements in profit-taking practices.
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Integrating established trend-following with portfolio optimization, this paper develops a systematic trading strategy for U.S. equities. Relying on momentum investing and mean-variance optimization, it offers practical refinements and addresses market constraints. Its moderate originality and applied enhancements yield fresh insights, making the work both interesting and valuable for finance professionals.
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Raw abstract and provenance
- … We propose a simple, fully automated, and intuitive strategy trading liquid US public equities that achieves superior risk-adjusted performance over index benchmark. The …
Source row: 1701 · abstract type: snippet