Jan 07
R-Squared and Portfolio Analysis
The following “movie” walks the viewer through an R-Squared look of a portfolio considered to be well diversified. In fact, the 10-asset class portfolio is highly correlated with the S&P 500 when using historical data over the last three years. Particularly surprising is the high correlation between the international index, EFA, and the S&P 500 benchmark.
The second section of the “movie” focuses on the projected annual returns for each of the iShares that represent an asset class, and the projected annual return for the overall portfolio. The standard deviation, or risk, is also calculated.
Using information from a portfolio made up of the “Big Six” asset classes, REITs, international, and bonds, the objective is to do further analysis to see how one might increase the projected annual return while reducing risk. This is the challenge for the passive investor.
Over the last two years this portfolio under performed its VTSMX benchmark by 0.4% points and the S&P 500 by 0.3%. The portfolio, as shown by the analysis, is highly correlated to the S&P 500.
Lowell Herr
Photograph: Government building in Budapest, Hungary
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