Learning To Invest | School Stock Picking Contest - How Do I Build The Best Portfolio?

1st Jun '16 by darkseb

2 comments 7502 reads

Hello everybody,

I'm doing a project for school. I have 1000 US stocks and I have to figure out to get the best portfolio with horizon one year. I own the US stocks with the largest market capitalization at the end of December 2015.

The sample period for data is monthly from January 1991 to December 2015. The only information I have is returns, turnover, book value, total assets, long term debt, gross profit and factors (hml, sml, mom, market premium).

I have never built a portfolio and I don't really know how to start. I can choose whatever stock for my portfolio and I don't need to use data if I want.

The only goal is to have a best portfolio in one year. Do you have any advice to propose me?

Best,

S

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Darkseb

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2 comments

Carey Blunt

1st Jun '16

Wow, school projects have got more interesting since I was at school! but I think you may have to re-read your post above and maybe clarify for us. Are you saying you have to pick 1000 shares now and see how they do in 1 years time? If so then why the historical period data?

I guess the key bits of information that people might need in order to help you would be.....
How big does your portfolio have to be? 20 stocks out of the 1000? 40?
Also what is the definition of "Best" - Safest? highest yielding? highest growth over the year?

if I had to guess, i would say that your tutors are looking for you to understand compounding and how dividends affect the overall result.
good luck!

Edward Croft

1st Jun '16

If it was me I'd do one of the following:

Firstly (advanced), if you've got SMB, HML and WML factors. I presume from Fama & French. Do a linear regression of every stock in your universe against those factors... find the stocks that are most exposed to those factors over a 60 day lookback period. Invest in them. I appreciate it's a bit quant oriented and doing thousands of regressions might take too long for your timeframe.

Alternatively (simpler) - make a basic QVM style ranking as follows:

Calculate a 'quality' metric - using Gross Profitability... i.e. calculate Gross Profits/Assets for every stock. Rank all the stocks for their gross profitability in a spreadsheet as percentiles between zero and 100.
Calculate a 'cheapness' metric... e.g. Price/Revenue, Price/Gross Profits (a proxy for the P/E) and the Price/Book . Calculate a rank for each (zero to 100 again) - then sum them and re-rank.
Calculate a 'momentum' metric... simply rank the returns for each stock over the last 6 to 12 months - again as a percentile between zero and 100.
Sum your quality, value and momentum metrics and choose the top 10 or 25 shares by your combined score.
Hope for some luck :-)

You can do these ranks in Google Sheets using the =PERCENTRANK() function. It's super easy.

If you don't know what I'm talking about you can learn a bit more about the principles here - http://help.stockopedia.com/knowledgebase/articles...

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School Stock Picking Contest - how do I build the best portfolio?

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Darkseb

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