Performance Backtesting

    Backtesting analysis is a crucial step in the portfolio management process. It involves analyzing the performance of a portfolio by applying a set of trading rules to historical market data. This analysis is used to evaluate the effectiveness of different investment strategies and to optimize portfolio performance. In this way, backtesting can help portfolio managers identify the most profitable strategies and minimize risk. By examining the historical performance of a portfolio, portfolio managers can gain valuable insights into how it may perform in the future, and adjust their investment strategies accordingly.

I have analyzed the performance of the portfolio for the years 2018 to 2022, and the results are as follows:

•  In 2018, the optimal portfolio obtained a return of 37.72% with a risk of 18.24%. The portfolio consisted of Microsoft (5%), Amazon (1%), Nvidia (11%), Meta (11%), Tesla (5%), PepsiCo (24%), T-Mobile (5%), Adobe (8%), Comcast (1%), and Netflix (10%). However, the portfolio's performance was negative, with a return of -6.62% compared to the benchmark (NASDAQ 100), which returned -3.96%. The M2 ratio was -1.6%, and the T2 ratio was -2.28%.

• In 2019, the optimal portfolio had a return of 34.07% with a risk of 25.40%. The portfolio consisted of Amazon (11%), Nvidia (29%), Broadcom (29%), Adobe (22%), and Netflix (8%). The portfolio's performance was 37.45%, outperforming the benchmark (NASDAQ 100), which returned 30.18%. The M2 ratio was -0.37%, and the T2 ratio was 3.23%.

• C. In 2020, the optimal portfolio had a return of 30.47% with a risk of 19.77%. The portfolio consisted of Microsoft (5%), Amazon (27%), Nvidia (21%), PepsiCo (9%), Costco (21%), T-Mobile (12%), and Netflix (6%). The portfolio's performance was 53.35%, outperforming the benchmark (NASDAQ 100), which returned 36.21%. The M2 ratio was 33.76%, and the T2 ratio was 42.8%.

• In 2021, the optimal portfolio had a return of 29.22% with a risk of 23.02%. The portfolio consisted of Apple (33%), Amazon (22%), Costco (28%), Adobe (15%), and Netflix (2%). The portfolio's performance was 21.69%, outperforming the benchmark (NASDAQ 100), which returned 19.38%. The M2 ratio was 7.04%, and the T2 ratio was -4.23%.

• In 2022, the optimal portfolio had a return of 42.29% with a risk of 29.41%. The portfolio consisted of Microsoft (44%), Apple (31%), and Netflix (20%). The portfolio's performance in this fifth year of fund activity is -27.73% compared to the benchmark's -40.2% (NASDAQ 100). In this fifth year, we obtained an M2 ratio of -5.98% and a T2 ratio of -52.06%.

The portfolio performed well in most years, outperforming the benchmark index. However, in 2018, the portfolio underperformed the benchmark, resulting in negative returns. The negative M2 and T2 ratios in 2018 indicate that the portfolio's performance was worse than the benchmark.

The optimal portfolio in 2019, 2020, 2021, and 2022 outperformed the benchmark, with positive M2 and T2 ratios, indicating superior risk-adjusted performance. The highest M2 and T2 ratios were observed in 2020, indicating that the portfolio's performance was significantly better than the benchmark.

Overall, as we can see here, the fund ended up with a very satisfactory performance, having achieved a holding period return of 45%, or an annualized return of 9.7%.

Do you think the current market trends will continue, and the portfolio will outperform the benchmark once again next year?

// M2, The Modigliani-Modigliani measure - is used to derive the risk-adjusted return of an investment.

// T2, indicates the excess return of the managed portfolio in comparison to the benchmark portfolio after adjusting for differences in the market risk.