After the initial back-test, conduct stress tests to evaluate the strategy’s robustness under various conditions, including different market regimes and starting dates.
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- This step is crucial to ensure that the strategy is not overly sensitive to starting point bias or specific market conditions and that it can deliver consistent performance across different market environments.
Back-Test Results with different Inception Dates (Strategy 4)
The Strategy 5 is not an option. The IR decrease to 0.3 and the historical result become almost random.
Back-Test Results with different Inception Dates (Strategy 5)
Comprehensive Summary of Strategy Analysis
The above framework outlines the critical steps involved in designing, back-testing, and refining an investment strategy based on Free Cash Flow Yield (FCFY) and Trailing 12-Month ROE.
By following this structured approach—combining variable selection, decile analysis, multi-factor modeling, and careful turnover management—you can create a high-performing, low-turnover strategy tailored to the S&P 500 or any other target universe. Continuous back-testing and stress-testing will further ensure that the strategy remains robust and adaptable across varying market conditions, positioning it for long-term success.
Initial Selection of Variables
Decile-Based Return Analysis for Predictive Power
Combining Variables for Multi-Factor Analysis
Stock Selection Based on Ranking System
Incorporation of Additional Buy-Sell Rules
Determining Buy-Sell Frequency
Rebalancing and Trim Frequency
Setting Trimming Boundaries
Determining the Number of Stocks in the Strategy
Back-Testing the Strategy
Turnover Management: Reducing Excessive Trading
Frequency Adjustment for Portfolio Trimming and Buy-Sell List
Portfolio Size Adjustment
