Macroaxis grades portfolios and equities in three main categories
1. Market Performance within the context of mean-variance optimization
2. Chance of Distress within the context of traditional fundamental data analysis
3. Diversification Score within the context of correlation analysis and portfolio composition
The performance score is an integer between 0 and 100 that
represents market performance of a financial instrument from risk-adjusted return prospective.
Generally speaking, the higher the score the better is overall performance
as compared to other investors. The score is normalized against average position of the entire investing universe
(the best we can interpret from the data available) and can be applied to a single equity instrument, portfolio of equities, or a group of portfolios.
To calculate the grade we take the best performance scores of all individual equity instruments and portfolios
and remove everything that falls beyond 3 standard deviations from the mean. The score is then calculated as a percentage
of averaged/normalized best score.
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Within this methodology scores of individual
equity instruments will always be inferior to the scores
of portfolios of equities as portfolios typically diversify a lot of
unsystematic risk away. This is why scores of 'good' stocks may seem
lower then would be otherwise expected by most investors. Simply put, we do not sugar code investor positions.
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Since most investors use various time horizons, have different tolerance for risk,
and hold different number of securities from different industries, you have to be
careful when interpreting the relative score of your position. Think of your score
as a naive interpretation of where your position stays in relation to the positions
of other investors. As our investor community grows we adjust the calculation
of the relative score to account for individual time horizons, different tolerance
for risk, sector and industry allocations, as well as number of securities and types of financial
instruments.
The formula to derive Macroaxis score is based on multiple factors that are weighted according to
Macroaxis proprietary algorithms. It utilizes Modern Portfolio Theory (MPT) as well
as other fundamental diversification methodologies. Among other things, these algorithms take
into account portfolio expected return and risk, number of assets,
market volatility, industry and country specifications as well as
types of securities that compose user portfolios.
Unlike evaluating score of a single portfolio or a group of portfolios, looking at performance score of an
individual equity instrument may not be enough because performance scores do not take into account any of
the fundamental data available for a given equity instrument. Macroaxis provides a single
grade for evaluating probability of bankruptcy of an equity instrument that have enough relevant information
on their current balance sheets. Macroaxis probability of bankruptcy score is a single number between 1 and 99 that
represents a chance of a company going through financial distress in the next 2 years.
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Probability of Bankruptcy compliments equity performance score by supplying investors with
insight into company financials without requiring them to know too much about all of the
complex accounting and financial ratios.
In a nutshell, companies with Probability of Bankruptcy above 90% are generally considered to be high risk with a good chance
of bankruptcy in the next 2 years. On the other hand companies with Probability of Bankruptcy of less than 15%
will most likely experience some growth in the next 2 years.
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Investors can think about Probability Of Bankruptcy as a normalized value of
Altman Z-score.
The score is used to predict probability of a firm going into bankruptcy within next 24 months and
is a very simple linear, multi-factor model that measures the financial health
and economic stability of a company. The score is used to predict probability of a
firm going into bankruptcy within next 24 months or two fiscal years from
the day stated on the available accounting statements.
The model uses five fundamental business ratios that are weighted according
to algorithm of Professor
Edward Altman
who developed it in late 1960s at New York University.
The portolio diversification score ranges from 0 to 100. The score of 100 means that portfolio positions are perfectly diversified against each other and the market.
If the diversification score is equal to 0, the portfolio has no diversification. There is only one way to get diversification score of 0 and that is
when the entire portfolio has only one security that historically generates negative risk-adjusted returns. In all other cases diversification score will not be zero.
If the diversification score is equal to 100, the portfolio has maximum diversification potential proven by positive long-term expected returns.
It is virtually imposible for a portfoio to have diversification score of 100.
The main idea behind diversification score is to grade a portfolio based on its potential to diversify away
both market-driven and non-market volatility and different sources of correlations that portfolio inherits after its origination.
It can also be used as a tool to ensure that investors
put their money into a range of asset classes at various allocations as opposed to putting it all in one bucket. Macroaxis diversification score is an adjusted value
of portfolio risk-adjusted performamce score. The value is adjusted based on the following factors:
1. Number of positions in the portfolio
2. Position weight distribution
3. Amount of cash not invested in the market
4. Portfolio Sharpe Ratio
Performance Computation Methodology
At this point to calculate Macroaxis scores of portfolios
users have to run one of our analytical modules from Wealth Management Toolset.
The updates to the score will be scheduled within a short period of time and will
be performed weekly, unless user runs one of the provided analytics.
