Our Asset Allocation Backtest Tool (a how to guide)

Our Asset Allocation Backtest Tool (a how to guide)

February 16, 2015 Tool How-To-Guides
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(Last Updated On: August 9, 2015)

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.

Alpha Architect Tools
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Step 2: If you already have a username and password, please sign in. If you are new to our tool, just take 30 second to sign up and use it for free!

Alpha Architect Tools Sign in
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Step 3: Click on the “Allocation Architect” Tool

Alpha Architect Tools Asset Allocation
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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
    • If Excess return >0, go long risky assets. Otherwise, go alternative assets (T-bills or Zero).
    • Popularized by Gary Antonacci and rigorously examined by Moskowitz et al.

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
  • Commodities
  • 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.

Alpha Architect Tools Asset Allocation_main chart
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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.
Alpha Architect Tools Asset Allocation risk management
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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)
Alpha Architect Tools Asset Allocation summary
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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.

Alpha Architect Tools Asset Allocation Rolling CAGR
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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.
Alpha Architect Tools Asset Allocation drawdown
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Step 5: The returns tab shows the annual returns for each portfolio.

Alpha Architect Tools Asset Allocation Returns
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Access the Allocation Architect Tools here.

Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.

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Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

  • Michael Milburn

    Wes, Wow- powerful tool – lots of of options. In the equity classes, do the value and momentum cuts represent the top decile of stocks for p/b or price chg?

    For 1992-present it seems like the risk management is actually more beneficial for value stocks instead of momentum (seems like it enhances overall return w/ value stocks and mkt timing). Is that your interpretation?

  • Yep, we have them linked to the French data site. Basically value = top decile value-weight b/m stocks and momentum = top decile 2-12 momentum value-weight.

    That sounds about right…but the horizon isn’t super long so it is hard to tell