90% Returns: Random Walk Portfolio Utilizing Promotional Intelligence Outperforms Benchmark
Random Walk partnered with Lucena Research to better understand the impact of email intelligence on share prices.
Lucena Research conducted a robust nearly 3 year backtest comparing the retail benchmark (XRT) with Random Walk’s(RW) proprietary methodology measuring email promotional aggressiveness. While the XRT returns were nearly flat, the RW portfolio generated 90% returns.
The RW Model uses Lucena’s machine learning to incorporate RW factors such as declines in promotional activity, compares steep discounting email volumes and overall promotional email volumes to determine portfolio constituents.
Here is how the Backtest works:
- Each day in backtesting the period from Dec 30, 2016 to July 23, 2019 we scan the Random Walk Universe (about 150 consumer stocks) for constituents that match the criteria for a long entry, which is determined during the training period from July 1, 2015 to December 12, 2016 using Lucena’s proprietary Machine Learning Algorithms.
- The long position is held as long as the model tells us to.
- The minimum value for allocation of each constituent is 5% and max value is 25% of the portfolio.
- Transaction cost and slippage are considered in this backtest.
Intuitive analysis of the signals generating events:
A long event is selected when:
- 12 week moving average of emails sent after log normalization and ranking against peers with discount percentage of 51- 100% is lower than 0.25 or in simpler terms when the number of emails sent in higher discount category of 51-100% is less over the previous 12 weeks as compared to other consumer brands.
- 18 week moving average of projected total volume of emails sent after log normalization and ranking against peers is higher or >0.75, or in simpler terms, when larger numbers of emails are being sent by the company over the previous 18 weeks compared to other consumer brands.
- Ratio of Trailing Twelve Month Earnings to Market Cap ranked against Russell 1000 constituents is between 0.6 and 0.971.
- Volatility over previous 252 days ranked against Russell 1000 constituents is between 0.02 to 0.6.