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The value of stop-loss, stop-gain strategies in dynamic asset allocation

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  • Austin Shelton

    (Florida Atlantic University)

Abstract

Dynamic asset allocation strategies which utilize stop-loss and stop-gain rules may dramatically decrease risk and even increase long-term return relative to other traditional asset allocation strategies. I introduce a dynamic asset allocation strategy which shifts portfolio weights based on predefined stop-loss and stop-gain rules. The two-asset (S&P mutual fund and bond mutual fund) strategy tested from 1990 to 2012 produces an annual geometric return of 8.45% vs. 7.50% for the underlying S&P 500 Index fund with 50% less volatility (9.41% vs. 18.76% for the S&P index fund). In addition, the strategy displays a positive and significant CAPM alpha over the sample period. The strategy’s very strong results are robust to changes in the user-specified parameters, such as the level and number of stop placements. All findings indicate that portfolio stop-loss and stop-gain rule-based strategies comprise a promising dynamic asset allocation approach deserving of further research and development.

Suggested Citation

  • Austin Shelton, 2017. "The value of stop-loss, stop-gain strategies in dynamic asset allocation," Journal of Asset Management, Palgrave Macmillan, vol. 18(2), pages 124-143, March.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:2:d:10.1057_s41260-016-0010-y
    DOI: 10.1057/s41260-016-0010-y
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    References listed on IDEAS

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    Cited by:

    1. Matteo Foglia & Maria Cristina Recchioni & Gloria Polinesi, 2021. "Smart Beta Allocation and Macroeconomic Variables: The Impact of COVID-19," Risks, MDPI, vol. 9(2), pages 1-25, February.

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    More about this item

    Keywords

    asset allocation; stop-loss; portfolio theory; risk management; dynamic asset allocation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G1 - Financial Economics - - General Financial Markets

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