Historical risk vs. return for 12 industries


Visit my Rpubs post.  Note the efficient frontier plots and weights in Section 3. It is interesting that although the Telecom sector looks undesirable in isolation (Section 2.3) it is desirable in a diversified portfolio (Sections 3.2 and 3.3).  More on portfolio theory another day…

2 thoughts on “Historical risk vs. return for 12 industries

  1. In reference to the weighting, and applying the JO stock screen method of selecting stocks for portfolio inclusion, what is the appropriate step to balance the JO screen results and your research for the minimum variance portfolio or the maximum return/risk ratio portfolio?

  2. Let me begin by stating I can not tell you about the future, I can only tell you about the history. With that disclaimer in mind you can combine JO screening with the portfolio weightings as follows:
    1. The portfolio weightings indicate where to invest your money. In the case of the research referenced in this post, that would be Energy (36.5%), Healthcare (27.6%), Telecom (22.3%, and Nondurables/staples (14.5%)
    2. Run the JO screen on those four sectors.
    3. Identify the best of the best in those four sectors
    4. Of your 36.5% in energy, split it evenly among the best of the best, of the 27.6% in healthcare split it evenly among the best of the best, and so on.

    Those four steps would be applicable to the 1927 to 2012 time period. There is no guarantee that would produce the best results for 2013 and beyond. To be thorough, one would estimate those weightings over time. Along with that time series of weightings you would include various macroeconomic factors (unemployment, GDP growth, population growth, interest rates, etc.) and make a forecast: over the next 10 years what type of macroeconomic environment do I anticipate? In that type of environment what where the optimal portfolio weights in the past? Then use those weights and repeat steps 1 through 4 above.

    Hope this helps.

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