The question considered in this article: How would the average fund have performed since 2010 if it just picked 10 stocks from NASDAQ-100 at random that were up in prior 120-day period? The answer may, or may not after all, surprise you.
- Buy at random ten stocks from NASDAQ-100 with 120-day rate of change greater than 0.
- Position size is available equity/10.
- Sell a stock if the 120-day rate of change falls below zero, or if it is not in the index any longer.
- Always keep a maximum of 10 stocks in the portfolio.
- Backtest period is from 01/04/2010 to 02/02/2021
- Repeat backtest 500 times and determine the distribution of annualized return (CAGR)
For the backtests in this article we used Norgate data for NASDAQ-100 index that include current and past constituents to remove survivorship bias. This is essential for generating realistic results. We highly recommend this data service (we do not have a referral arrangement with the company.)
Below is a table of basic statistics:
|Average max DD||-26%|
Note that in the test period, buy and hold CAGR for NASDAQ-100 is 19.3% and maximum drawdown is 28%.
- Worst annualized return was about 11% with the random investing.
- A few random investors outperformed buy and hold.
- The “average random investor” made about 16% annualized return.
Next the questions
- How many macro and quantitative funds did worse than random investors?
- Or, better, are macro and quantitative funds worse-than-random investors?
Answers to the above questions are left as an exercise to the reader.
Charting and backtesting program: Amibroker
Data provider: Norgate Data
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