Using SMA to Reduce Volatility of Returns

Introduction

We saw how a CNX 100 50-day tactical investment strategy boosts returns of a naive buy-and-hold strategy (here) even while considering trading costs and other friction (here.) To visualize how this works, lets have a look at the histogram of daily returns since 2010 (1150 trading days.)

Naive buy-and-hold

bh-returns-2010
Daily Returns
<= -2%
36 days
<= -1%
165 days
>= +2%
41 days
>= +1%
188 days
Average
+0.04%
Std. Dev.
1.07

200-day SMA switch

200-sma-returns-2010
Daily Returns
<= -2%
16 days
<= -2%
85 days
>= +2%
21 days
>= +1%
122 days
Average
+0.07%
Std. Dev.
0.79

100-day SMA switch

100-sma-returns-2010
Daily Returns
<= -2%
11 days
<= -2%
66 days
>= +2%
21 days
>= +1%
114 days
Average
+0.09%
Std. Dev.
0.74

50-day SMA switch

50-sma-returns-2010
Daily Returns
<= -2%
7 days
<= -2%
53 days
>= +2%
24 days
>= +1%
110 days
Average
+0.11%
Std. Dev.
0.71

Conclusion

Even after considering trading costs, impact costs and tracking error, this strategy comes out way ahead of a naive buy-and-hold strategy. Better returns than buy-and-hold with lower volatility and at a low cost!

You can follow the Theme here.

Comments are closed, but trackbacks and pingbacks are open.