The Prisma platform helps investors to better anticipate market extremes and offers risk indicators that enable them to adapt their equity exposure and generate more consistent returns. Prisma also allows investors to create specific portfolios and backtest the performance of the indicators applied to them. In this article we will show how to get started with this feature by creating a portfolio and backtesting an indicator on it. To benefit from the feature, you can register here.

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Creating and backtesting a portfolio

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Creating a portfolio for testing is quite simple on Prisma. Open the “Portfolios” tab in the left-hand bar and click on the “Create new portfolio” feature. This takes us to the portfolio creation page, where we can name the portfolio and define the weights of the different assets.

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For this article, we will create a simple portfolio composed of:

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1. 50% S&P 500 index ETF (SPY:US)
2. 30% gold ETF (GLD:US)
3. 20% USD (cash)

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The portfolios can however have a large number of assets, the only condition is that the sum of their weights equals 100%.

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Once the portfolio is created, it is automatically saved in the “Portfolios” tab and it is possible to backtest it in the “Simulation” section by selecting the frequency of rebalancing and the benchmark. Afterward, one has access to a variety of analyses ranging from statistics to charts.

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Here are the results obtained by our test portfolio, taking the S&P 500 index as a benchmark and applying a quarterly rebalancing with transaction costs of 5 basis points (0.05%). The following graphs show the historical performance as well as the relative performance of our portfolio compared to its benchmark.

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Let us now try to improve such a portfolio by adapting the weights we allocate to our assets.

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Tactical Asset Allocation (TAA)

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Now that our portfolio is created and saved, we can test one of the Prisma indicators applied to this asset allocation on the Tools tab. A user can also use an indicator they have created themselves. For this demonstration, the equity risk indicator (ERIC) is used. For each asset, the user has to decide whether this asset is a growth asset or a defensive asset (for hedging). In our demonstration portfolio, the S&P 500 ETF is a growth asset, while gold and cash are used as defensive assets. We then need to determine the Strategic Asset Allocation (SAA) for each asset. This is the average allocation we want to target over the long term. Finally, we can add the minimum and maximum weightings, i.e. the minimum and maximum we want to allocate to each asset. Note that the sum of the SAAs must add up to 100%, but of course not the min and max weights. Other technical parameters can be selected in the Advanced section, but in this article, we want to test a simple strategy. This is what a backtest looks like that can be started immediately:

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Let us now analyse the results of the tactical asset allocation. The benchmark is the portfolio to which the SAA is applied. Below are the results after the backtest has been performed.

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For our demonstration portfolio, the equity risk indicator enables an improvement in both absolute returns and Sharpe ratio (risk-adjusted return). For further analysis, numerous charts and statistics are available for you to discover, including historical, statistical and relative performance of our TAA compared to its benchmark (unconditional SAA), as shown below:

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We encourage investors to create specific portfolios and test the impact of Prisma indicators on these portfolios. By allowing everyone to create their own indicators and portfolios, Prisma offers investors a huge potential of possible strategies and portfolio allocations and thus customisation.

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Disclaimer:

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This content is advertising material. This content as well as all information displayed on Prisma or any of Alquant’s websites does not constitute investment advice or recommendation, and shall not be construed as a solicitation or an offer for sale or purchase of any products, to effect any transactions or to conclude any legal act of any kind whatsoever. Past performance is not a guide to future performance.