### 100% equity(NIFTY50) VS. dynamic allocation (65-90% equity, 35-10% gold)

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

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