Today is risk off: Best, Optimized Investment Portfolio has 62 Common Stocks

Good morning readers,

Our Chicago Quantum Net Score model found the best solution last night with 62 US-listed common stocks, giving an edge of 7 x 10-5, which is a meaningful, but smaller than usual edge over investing in the $SPY, or the S&P 500 Index ETF. This is based on our proprietary platform and algorithm to find portfolios with the biggest difference between the portfolio's historical risk and expected returns.

A portfolio that requires 62 stocks to gain an edge on the market is calling for significant diversification, with a holding pattern similar to the S&P 500. The top 25 portfolios have between 59 and 63 stocks.

Our portfolio model selects a group of stocks that are held evenly, so 62 stocks means 1/62 of your portfolio is invested in each one.

Our portfolio model excludes ETFs, so you will not end up holding multiple 'copies' of a popular stock. We are considering to add back the commodity ETFs as that can give an investor an additional edge. We are thinking of ETFs like SLV (silver), AAAU (gold), USO (oil), and CPER (copper).

Why is the model risk off?  We see three potential reasons:

1.  The expected return and the risk-free rate of return over the next 12 months are converging, and the expected benefit of holding risk is 4% or less today. That means our model is mathematically looking at reducing risk more than it is looking at increasing returns. Lower risk means greater numbers of stocks.
2. A rising tide lifts all boats in this market. It is possible that there are fewer situations where stocks counter-act each other, and have negative (stock - stock) correlations.
3. The large-cap stocks are starting to see a 'flight to safety' and are less volatile in this liquidity constrained market, so they are relatively more attractive than small cap stocks. This last one is a stretch.

We do see negative BETA stocks in today's run, so there are still anomalies out there. These move opposite to the SPY and have done so for the past year.

 Here are the stocks with BETA values outside the data validation range. 

CDTX   -0.370 Cidara Therapeutics Inc                           
CPK    -0.611 Chesapeake Utilities Corp                         
CYN    -0.532 Cyngn Inc                                         
FWBI   -0.369 First Wave BioPharma Inc                          
GWAV   -0.468 Greenwave Technology Solutions Inc                
MFH    -0.185 Mercurity Fintech Holding Inc                     
MKUL   -0.593 Molekule Group Inc                                
SMMT   -0.135 Summit Therapeutics Inc                           
UHAL   -1.361 U-Haul Holding Company                            
VERU   -0.885 Veru Inc   
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​Good luck to all.

Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
Chicago Quantum
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