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)

  1. NIFTY 50
  2. 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

  1. NIFTY – Calculated 50D moving average and respective 1Y returns thereafter
  2. XAU * INR – Calculated 50D moving average and 1Y returns thereafter

50d1yMA.jpg

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)

correlation vs 50dm1yr.png

 

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

 

 

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