Momentum Investing

Rohit Ramaswamy | June 7, 2021


The objective of this assignment was to use the Wright Research  simulator to backtest strategies based on certain themes (indicators). The  strategies implemented could then be evaluated on the basis of the metrics  provided by the platform. The platform gave a result in the form of a plot of  the portfolio returns against Nifty 50 in the same time period. This plot was  normalised at 100 on inception and the return was plotted on the same %  scale. The metrics presented to evaluate the portfolio were annualised risk,  annualised return, max drawdown and Sharpe ratio. Data was plotted for the  range starting from January 2011 to January 2019. 

There are four steps needed to form a portfolio. The first step being  choosing the universe of stocks, top 500 stocks, large cap and mid-cap  stocks. The second step was to choose the sectors and industries the  portfolio has to comprise of followed by the third step being to choose the  frequency of the portfolio to be balanced. The last step to choose the theme  of investing here a combination of factors or indicators can be used which  would form the basis of choosing and rebalancing stocks in the portfolio. The  other advanced parameters that could be tweaked were normalisation,  position sizing and cost. 

The objective of the underlying objective of doing so was to maximise  the annual return and sharpe ratio while keeping annualised risk and max  drawdown down minimum. Going ahead with back testing the underlying  theme was momentum investing. Both long-term as well as short-term  momentum was considered and that was the theme of this exercise. Coming  on to choosing the universe the top 500 stocks were chosen. Since this is a  portfolio for investing and not for trading the frequency had to be a higher  frequency. Another reason for doing so was to keep the cost of the balance  in the portfolio to the minimum hence the frequency was yearly.  

When it comes to choosing sectors to be included in the strategy, first  each sector was seen individually and the Sharpe ratio was noted for the  

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same. A good Sharpe ratio is kept as the first criterion for evaluating the  strategy. The Sharpe ratio for the sectors individually was as follows: 

Sector 

Sharpe Ratio

Automobile 

1.37

Textiles 

1.11

FMCG 

0.95

Diversified 

0.84

Healthcare 

0.8

Banking 

0.79

Engineering 

0.79

Chemicals 

0.76

Financial 

0.74

Construction 

0.67

Communication 

0.31

Other 

0.16

Consumer durables 

0.13

Services 

0.07

Technology 

-0.16

Energy 

-0.35

Metal 

-0.43



This was then used to narrow down on the sectors which were in  momentum and gave good results in the time period. The chosen were  Automobile, Textile, FMCG and Diversified sectors. Adding on to this, the  cross sectional normalisation and inverse vol position sizing was chosen and  the results of the bank tested strategy are shown below: 

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Annualized return 

Annualized Risk 

Max Drawdown 

Sharpe Ratio

24.6 

11.17 

24.86 

1.67



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