Question

6. Your boss has asked you to evaluate a portfolio strategy that purports to capture all of the upside and none of the downside of the market. The key is a complex rule for buying and selling shares. You decide to simulate the strategy and discover that it lags the market on the upside and loses a small amount on average when the market declines. What’s more, when you test the strategy with historical data it suffers sharp losses in a few volatile periods. How would you describe the essence of the trading rule to your boss? How would you explain your simulated results?

Answer 1

This trading rule will be reflecting that portfolio is exposed to both of the upside and the downside in the market because no portfolio can only have the upside advantage and none of the downside exposure so I will be trying to educate my boss about exposure of systematic risk that cannot be eliminated into the portfolio because systematic risk will be representing the macro risk which cannot be managed by the company and these risks are are beyond the control of the company so I will be trying to advocate that these risks of systematic in nature should be accounted in management of the portfolio and Portfolio should be both exposed to the upside and the downside.

I should be trying to describe the simulated result about the portfolio that why portfolio is underperforming the market when the market is going up,and Portfolio is outperforming the market and market is going down so it can be said that the portfolio is continuously flawed as this strategy is not representing proper management of upside and the downside and it is just trying to capture one of the movement and it is highly exposed when it is simulated through the historical returns that it will be underperforming the market on huge basis, so I will be trying to adjust the market strategy for downside also in order to have a better understanding of risk and reward