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I analyzed the historic data of the SP500 and tried a trading simulation on it. I picked the best 20 companies from SP500 for one year according to their ROE and put them in one portfolio. Let's call this TOP-Portfolio for now. I've also done this for the worst companies - BOTTOM-Portfolio and I've created a MIXED-Portfolio with the top 20, and bottom 20 companies.

Then I simulated a 52 weeks to represent a whole year. If a company is no longer in the SP500, I 'sold' this company and distributed it's current value along all the other remaining companies. There are no companies bought during one year.

If the year is over, I 'sell' all the companies and again create the 3 portfolios and distribute the whole money from the old portfolios on the new ones (money from old TOP-Porfolio will be distributed on the new TOP-Portfolio and so on).

My mixed portfolio performs better than the bottom and the top portfolio. Is there a possibility that this outcome is still true? Since I thought the mixed portfolio would perform like the average of the TOP- and the BOTTOM-Portfolio, this outcome is rather strange for me.

I'd appreciate any help from you.

Here is a plot of my outcome: enter image description here

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    $\begingroup$ What is the difference between mixed (blue) and mixed 40 (yellow)? $\endgroup$
    – Alex C
    Commented Jun 28, 2019 at 16:48
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    $\begingroup$ What is the weighting scheme within each portfolio (equal weighted?) Are the weights reset (rebalancing) from time to time? $\endgroup$
    – Alex C
    Commented Jun 28, 2019 at 17:11
  • $\begingroup$ @Alex the mixed (blue) contains the top 10 and bottom 10 companies. The yellow one contains the top 20 and bottom 20 companies. $\endgroup$
    – raphael_mav
    Commented Jun 29, 2019 at 17:13
  • $\begingroup$ The portfolio is equal weighted and gets rebalanced once a year, during the creation of the new portfolios. $\endgroup$
    – raphael_mav
    Commented Jun 29, 2019 at 17:14
  • $\begingroup$ If you set N to 500, all three portfolios will be same by composition and should have the same performance. It's worth checking this case to catch any errors. $\endgroup$
    – Sergei Rodionov
    Commented Mar 20, 2021 at 7:32

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This is likely attributable to one of a couple things:

(1) Your portfolio size for the top/bottom set are on the small side. If you broke the SP500 into quintiles by performance, made top (100) your top portfolio, bottom (100) your bottom portfolio, you're likely to see a more interesting result.

(2) As an addendum to (1), your mixed portfolio probably performs better in large part due to diversification. Particularly bucketing based on a single attribute (not to mention one somewhat disconnected from absolute stock market return like ROE), your classification is much more likely the result of noise/anomaly, and as such your results lack robustness you'd hope to see.

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  • $\begingroup$ Thank you for your evaluation, it helped me alot. I overthought it myself a few times and it seems to me that the main reason for this result is the distribution of the companies, which drop out of the index. With this distribution, the performance of the MIXED-Portfolio, hasn't much in common with the average value of the Top and Bottom Portfolio. I'll write a more detailed answer later :) $\endgroup$
    – raphael_mav
    Commented Jun 29, 2019 at 17:37

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