Our Asset Allocation Backtesting Tool is Live!
You can build and backest your own asset allocation portfolio using our “Allocation Architect” tool.
How to Access the Tool?
Step 1: Click “Our tools” tab from our main website page.
Step 3: Click on the “Allocation Architect” Tool
How to Use the “Allocation Architect” Tool?
This tool will help you build a custom allocation portfolio by allowing the user to select different asset class weights, different time horizons, and toggle risk-management.
Step 1: Portfolio Inputs: select the time period you want to back test, and select the lookback for the risk-management rules (Simple Moving Average “SMA” rules and Time Series Momentum “TSMOM”). For example, if the user inputs “12” for the SMA and TSMOM rules, when risk-management is selected, the system will apply a 12-month SMA and a 12-month TSMOM rule to each asset class. If the asset class signal for SMA and TSMOM is positive, the asset will be 100% invested; if the signals are mixed, the asset will be 50% invested; and if the signals are both negative, the asset will be 0% invested (proceeds will go into treasury bills). SMA and TSMOM rules are explained here.
1. Time Series Momentum Rule (MOM)
- Excess return = total return over past x months less return of T-bill
2. Simple Moving Average Rule (SMA)
- Moving Average (N) = average N month prices
- If Current Price – Moving Average (N) > 0, go long risky assets. Otherwise, go alternative assets (T-bills or Zero).
Step 2: Input custom allocation weights for the different assets: Input numbers directly or toggle the “up” and “down” buttons to adjust weights. We provide 5 core asset classes:
- Domestic Equity
- International Equity
- Real Estate
- 10-year Treasury Bonds
We also include value and momentum equity exposures for domestic and international markets as well as the treasury bill return.
The total weights must equal 100%.
*Tips: If you want to learn more about each asset, just point your mouse over them. You can get access to the data resources by clicking them.
Step 3: Click “Calculate” button to see the performance results.
Understanding the Performance results
Step 1: When you hit the “Calculate” button the server will calculate your results (be patient, this could take 5 to 15 seconds).
- Show “risk managed” results by clicking the slider button.
- Your custom portfolio (with/without risk-managed) will be compared to the performance of the balanced version of the “Robust Asset Allocation Model.” The moderate and aggressive versions are also available by checking the boxes.
- RAA_BAL = 40% Equity; 40% Real; 20% Bonds. Equity split between value and momentum. Risk-Managed.
- RAA_MOD = 60% Equity; 20% Real; 20% Bonds. Equity split between value and momentum. Risk-Managed.
- RAA_AGG = 80% Equity; 10% Real; 10% Bonds. Equity split between value and momentum. Risk-Managed.
Step 2: The summary tab shows the summary statistics for each portfolio.
- CAGR: Compound annual growth rate
- Standard Deviation: Sample standard deviation
- Downside Deviation: Sample standard deviation, but only monthly observations below 41.67bps (5%/12) are included in the calculation
- Sharpe Ratio (annualized): Average monthly return minus treasury bills divided by standard deviation
- Sortino Ratio (annualized): Average monthly return minus treasury bills divided by downside deviation
- Worst Drawdown: Worst peak to trough performance (measured based on monthly returns)
Step 3: The Rolling CAGR shows the rolling compound annual growth rates over X years. We provide results for 1-, 3-, 5-, and 10-year rolling horizons when the data is available.
Step 4: The Drawdown tab shows the summary statistics for each portfolio.
- The Max Drawdown measure is calculated as the peak-to-trough decline since inception, using monthly returns.
- The Worst-Case Holding Period returns calculate all possible holding period returns for a given holding period length and reports the worst possible holding period return. For example, the worst 6-month holding period return is identified by calculating all possible 6-month holding period returns since inception. For a 12-month track record, there would be 7 possible 6-month holding period returns (e.g., month 1 to month 6, month 2 to month 7, and so forth). We then report the 6-month holding period return that has the worst performance as the worst 6-month holding period return. It is possible that the worst possible 3-month holding period return may be worse than the worst possible 6-month holding period return, because the holding period requirement is different. For example, there might be a -10% 3-month holding period return from month 1 to month 3, and a month 1 to month 6 holding period return of -5%, which happens to be the worst 6-month holding period return. In this scenario the worst case 3-month holding period return will be larger than the worst case 6-month holding period return.
Step 5: The returns tab shows the annual returns for each portfolio.
Access the Allocation Architect Tools here.