How We Construct and Backtest our 50 Stock Portfolios Rebalanced Quarterly

We construct portfolios beginning with a population of the top 2,000 U.S. stocks by market cap. After calculating expected returns on these, we rank the stocks from lowest to highest expected return.

Next we filter out stocks with a price under $5 per share or a market cap under $300M. In the tests shown here, we imposed no constraints for sector weighting.

From that remaining population, we select the best 50 stocks for each strategy (the highest expected return stocks for the long only strategies; highest and lowest expected returns for a market neutral strategy).

After a three month period, on a rotating basis, we rebalance each portfolio. Based on newly generated expected returns, we replace up to 50 stocks (100%).

All backtests use date-stamped data to eliminate the possibility of look-ahead bias. We include a benchmark in each chart for comparison purposes.

In the backtests we use one of our two models, either our Standard Model or our Enhanced Model which is labeled at the top of the page.

Starting with 1996, at the beginning of each month we successively form 3 equally weighted portfolios (tranches). One begins in January, the 2nd in February and the 3rd in March. The monthly returns for each tranche are linked and annualized. When the tranches are rebalanced they are not rebalanced to equal a third of the total portfolio value; instead each tranche is invested mutually exclusive for the remainder of the backtest. Those 3 annualized returns are then averaged, simulating a strategy whereby one invests equally in each tranche. Each of the three tranches consists of 50 stocks, so if there is no overlap in the top expected returns from month to month the portfolio will be allocated among 150 different stocks after the first three months. In the Market Neutral Strategy it is possible for there to be up to 300 different stocks (150 positions long and 150 positions short).

To see portfolio returns for each strategy, choose from the menu to the left.

For more details, click on the terms at the bottom of each chart.