Did some data crunching and used some calculation matrix so ascertain whether Equity (here NIFTY50) outperformed XAU * INR (Gold in $ multiplied to INR). Below is the outcome.
Returns
Asset Class | Investment Date | Investment Amount | Current Date | Current Value |
NIFTY50 | 19jul1996 | 100 | 17Oct2016 | 757 |
XAU*INR | 19jul1996 | 100 | 17Oct2016 | 614 |
NIFTY+(XAU*INR)^{!} | 19jul1996 | 100 | 17Oct2016 | 892 |
^{!}asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))
Risk (Standard Deviation)
Equity – 28.42%
XAU * INR – 15.65%
NIFTY+(XAU*INR)^{!} – 23.11%
^{!}asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))
Period wise Out performance
Out of 4821 days, 354 days only NIFTY portfolio would have yielded more where else 4467 days NIFTY+(XAU*INR)^{!}would have outperformed.
^{!}asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))
What data crunching? What analysis?
Data used (last twenty years; Total data points used 4821)
- NIFTY 50
- XAU Gold (in $) * INR (MCX spot wasn’t available from 1996 also MCX spot would include duty impact as well which could tweak relation matrix.
Steps followed
- NIFTY – Calculated 50D moving average and respective 1Y returns thereafter
- XAU * INR – Calculated 50D moving average and 1Y returns thereafter
What about chart above? -> 50D 1YMA returns always mean revert
Assuming 40%, a higher end number, on 50D1YMA(50D 1 year moving average return for NIFTY50) I ran following calculation:
IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))
Which says, a fund will not go below 65% and above 90% in equity at any point in time and higher the 50D1yMA nifty returns lower will be the allocation to equity. At 40% 50D1YMA equity allocation would be minimum, which is 65%.
My Myth which disentangled
Gold is not negatively, rather positively correlated to equity(On a long term basis – 20years)
NIFTY 50 | DowJ | XAU | INR | XAU*INR | |
NIFTY 50 | 1 | ||||
DowJ | 0.86 | 1 | |||
XAU | 0.86 | 0.64 | 1 | ||
INR | 0.75 | 0.84 | 0.61 | 1 | |
(XAU*INR)^{!} | 0.90 | 0.75 | 0.97 | 0.77 | 1 |
^{!}asset allocation based on-> IF(((40%-50D1YMA)/40%)>0.9,0.9,((40%-50D1YMA)/40%))
However correlation turns negative for most of the times when equity 50D1YMA moves northward of 20% and that is the reason why it is successful in generating alpha vis-à-vis NIFTY50 with relatively less risk(Standard deviation)
Again below is the returns matrix
Asset Class | Investment Date | Investment Amount | Current Date | Current Value |
NIFTY50 | 19jul1996 | 100 | 17Oct2016 | 757 |
XAU*INR | 19jul1996 | 100 | 17Oct2016 | 614 |
NIFTY+(XAU*INR)^{!} | 19jul1996 | 100 | 17Oct2016 | 892 |
Suggestion/Feedback is welcome
Written
on January 15, 2015