60/40 Backtest

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60/40 Backtest

Belmont
I have been searching everywhere for this, but I can't find an example.  I would think that it should be a very basic thing.

I want to test several different portfolio optimization methods, including mean-variance, minimum-variance, and most-diversified portfolio.  I know how to do all these things with stocks, but am not sure how to include bonds.  I want to use a simple 60/40 portfolio (rebalanced monthly) as a benchmark.  Does anyone have an example of how to backtest a 60/40 portfolio?  

I am partly interested to find out what the best bond index is to use for it.  Assuming I just fall back on using the S&P500 for the stock component and US 10-Year for the bond component, how do I translate the 10-year yields off FRED into prices?  I have access to the Barclay's and JP Morgan aggregate bond indexes at work, but would rather use an open source (such as Yahoo or FRED) for this project so that I can pass it along to someone else without any issues.

Thanks so much in advance for any help!

Regards,
John Belmont
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Re: 60/40 Backtest

Kenton Russell

See if Historical
Sources of Bond Returns-Comparison of Daily to Monthly might help.  It offers a way to translate FRED rates to a price and total return series.  For data back to 1919, you can use the FRED Moody's BAA or AAA rates as in Extreme
Bond Returns and Bonds
Risk and Return by Rating. There are lots of ways to get a 60/40 benchmark.  Generally, I will just merge the equity and bond returns into one xts (for this example returns), and then do returns <- na.omit(merge(bond,equity))
benchmark <- returns[,1] * 0.6 + returns[,2] *0.4 This of course assumes monthly rebalancing if you are using monthly returns. Hope this helps. KentDate: Sun, 8 Jan 2012 16:52:48 -0800
From: [hidden email]
To: [hidden email]
Subject: [R-SIG-Finance] 60/40 Backtest

I have been searching everywhere for this, but I can't find an example.  I would think that it should be a very basic thing.
 
I want to test several different portfolio optimization methods, including mean-variance, minimum-variance, and most-diversified portfolio.  I know how to do all these things with stocks, but am not sure how to include bonds.  I want to use a simple 60/40 portfolio (rebalanced monthly) as a benchmark.  Does anyone have an example of how to backtest a 60/40 portfolio?  
 
I am partly interested to find out what the best bond index is to use for it.  Assuming I just fall back on using the S&P500 for the stock component and US 10-Year for the bond component, how do I translate the 10-year yields off FRED into prices?  I have access to the Barclay's and JP Morgan aggregate bond indexes at work, but would rather use an open source (such as Yahoo or FRED) for this project so that I can pass it along to someone else without any issues.
 
Thanks so much in advance for any help!
 
Regards,
John Belmont
        [[alternative HTML version deleted]]
 

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Re: 60/40 Backtest

Kenton Russell

Sorry it appears my first links did not come through.  The links are http://timelyportfolio.blogspot.com/2011/04/historical-sources-of-bond-returns_17.html, http://timelyportfolio.blogspot.com/2012/01/extreme-bond-returns.html, and http://timelyportfolio.blogspot.com/2011/06/bonds-risk-and-return-by-rating.html.
 > From: [hidden email]

> To: [hidden email]; [hidden email]
> Date: Sun, 8 Jan 2012 20:23:04 -0600
> Subject: Re: [R-SIG-Finance] 60/40 Backtest
>
>
> See if Historical
> Sources of Bond Returns-Comparison of Daily to Monthly might help.  It offers a way to translate FRED rates to a price and total return series.  For data back to 1919, you can use the FRED Moody's BAA or AAA rates as in Extreme
> Bond Returns and Bonds
> Risk and Return by Rating. There are lots of ways to get a 60/40 benchmark.  Generally, I will just merge the equity and bond returns into one xts (for this example returns), and then do returns <- na.omit(merge(bond,equity))
> benchmark <- returns[,1] * 0.6 + returns[,2] *0.4 This of course assumes monthly rebalancing if you are using monthly returns. Hope this helps. KentDate: Sun, 8 Jan 2012 16:52:48 -0800
> From: [hidden email]
> To: [hidden email]
> Subject: [R-SIG-Finance] 60/40 Backtest
>
> I have been searching everywhere for this, but I can't find an example.  I would think that it should be a very basic thing.
>  
> I want to test several different portfolio optimization methods, including mean-variance, minimum-variance, and most-diversified portfolio.  I know how to do all these things with stocks, but am not sure how to include bonds.  I want to use a simple 60/40 portfolio (rebalanced monthly) as a benchmark.  Does anyone have an example of how to backtest a 60/40 portfolio?  
>  
> I am partly interested to find out what the best bond index is to use for it.  Assuming I just fall back on using the S&P500 for the stock component and US 10-Year for the bond component, how do I translate the 10-year yields off FRED into prices?  I have access to the Barclay's and JP Morgan aggregate bond indexes at work, but would rather use an open source (such as Yahoo or FRED) for this project so that I can pass it along to someone else without any issues.
>  
> Thanks so much in advance for any help!
>  
> Regards,
> John Belmont
> [[alternative HTML version deleted]]
>  
>
> _______________________________________________
> [hidden email] mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.
> -- Also note that this is not the r-help list where general R questions should go.    
> [[alternative HTML version deleted]]
>
> _______________________________________________
> [hidden email] mailing list
> https://stat.ethz.ch/mailman/listinfo/r-sig-finance
> -- Subscriber-posting only. If you want to post, subscribe first.
> -- Also note that this is not the r-help list where general R questions should go.
     
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