Constructing and Analyzing Stock Portfolios With GeWorko Method

GeWorko method allows you to construct any combination of assets from a set of available instruments. In this article we would like to draw attention to the U.S. stock market, choose a few securities, build a chart of the resulting portfolio and analyze its behavior over several recent years.

As known, the financial crisis that erupted in 2008, has led to serious consequences for the global financial system and significant losses to investors. For four and a half years the world has been trying to recover, and only recently signs of economic recovery in the world’s largest economy – the United States – have begun to appear.

One of the oldest and most well-known stock market design portfolio indices – Dow Jones Industrial Average- only in March 2013 was able to fully recover and reach the pre-crisis peak of autumn 2007, above the level of 14,000 points. Thus, for one year and a half (Fall 2007 – Spring 2009), the index lost one half of its value, and it took four years to regain lost positions.

With the help of GeWorko method we will try to find out whether there was such a portfolio of shares that would protect our potential investments in U.S. stocks from impairment during the crisis, and to evaluate its profitability.

As it is known, during the financial crisis, financial companies suffered most. In this regard, among all the included stocks in the index Dow Jones Industrial Average we selected stocks of companies representing other sectors of the economy, in particular – companies involved in the production of consumer goods, in development and production of high-tech goods, food production, as well as media companies. The following were included in our sample (with appropriate random weights):

1. Walt Disney Company (DIS – 20%)
2. Home Depot Inc. (HD – 20%)
3. Honeywell International Inc. (HON – 15%)
4. International Business Machines Corporation (IBM – 15%)
6. McDonald’s Corporation (MCD – 20%)

With the help of GeWorko method a portfolio is created consisting of the six above-mentioned securities with specified weights. Assume that the current value of the portfolio is $ 10,000, then $ 2,000 is invested in Walt Disney Company, Home Depot and McDonald’s Corporation (total investment of $ 6,000); 1500 dollars – in Honeywell International and International Business Machines Corporation.

The chart of the Portfolio allows retrospectively assess its performance and profitability over the past few years. In pre-crisis years 2007 and 2008 the value of our portfolio was below the level of U.S. $ 6200, and during the crisis, it dropped to 3673 dollars. We can already draw first conclusions. First, the value of the portfolio during the crisis fell by about 40%, showing a slightly better result than the index Dow Jones Industrial Average. Second, a full recovery of the portfolio value did not take four years, but only one year. Finally, in the post-crisis period the portfolio gained more than 170% (the figure is calculated based on the latest value relative to the minimum value in March 2009).

Of course, the value of the created portfolio has been seriously affected by the financial crisis, but its rapid recovery is really impressive and gives us hope for good results in the future.

The next step of our analysis will focus on comparison of portfolio dynamics with the market. In our case, the market will be represented by the index Dow Jones Industrial Average. We have noticed that the portfolio showed less negative results during the crisis and a more rapid recovery. Let’s plot a chart of the portfolio relative to the index in order to confirm our assumption of a higher return from investment in the portfolio than in the index, and see how much the portfolio has outperformed the market.

To do this, PCI will be used: the same portfolio of stocks with the same asset weights and current investment value of U.S. $ 10,000 is built. In the quotation a portfolio of $ 10,000 is invested in the index Dow Jones Industrial Average.

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