Revisiting EQUITY RISK PREMIUM

Research
21

So I don’t post on here much being frankly I have very little background in stocks. Picked up WWOWS 2 years ago and have been trying to read,research and learn as much as possible. I see Marc states that 10yr is 1.74%. In Georg’s sim it subtracts 1.75. Would this be the going rate of the 10yr or wouldn’t this number (1.75) be variable over time with the changing rate?

Thanks in advance and sorry if this is a dumb question. Just trying to surround myself with knowledgeable folks and learn a thing or two on the way.

22

This is not one of those rates that’s set by policy. It’s a rate that’s determined every day and all day as a result of trading in the market.

23

Ok, thank you for the response. It is good to know that I was at least somewhat right.

Side note, I recently ordered your book that was in the list of suggested books Marc. Look forward to reading it!

Also if anyone else has a good way to learn more of the features on P123 I’d be more than appreciate it. I’m learning from scratch for the most part and have been learning what I can with what is suggested on here.

Thanks and all the best!

Ryne

24

I’ve written a guide to our most important functions here, in case you haven’t already looked at it: https://www.portfolio123.com/doc/side_help_item.jsp?id=11

25

Thank you Yuval. I’ll dive into it!

Ryne

26

I have recently had another look at the FED model. It looks like the trigger value of 2.0% separating undervalued and overvalued is too low. https://www.portfolio123.com/doc/side_help_item.jsp?id=1

So following up from Chris’ (ETFOptimize) comments I produced a model using the inverse of the CAPE ratio and the 10Y Treasury yield to arrive at the “The Cyclically Adjusted Risk Premium As An Indicator Of Market Risk” (CARP). I believe THE CARP works better than the S&P Risk Premium which the Fed model uses.
Here is the link to the SA article.
https://seekingalpha.com/article/4438560-cyclically-adjusted-risk-premium-indicator-market-risk

When combined with other market timers one can get some good results. Here are the rules for a sim with 3 market timers ($YieldCurveHedge, $CARP, $port_sum) that shows an annualized return of 29% with a low D/D of -15%. (I won’t post the performance picture here.)
Buy: ticker(“UST,TLT,GLD”)&$YieldCurveHedge_Entry_New | Eval($CARP>1.7|$port_sum >3, ticker(“RSP,XLK,VIG”), ticker(“UBT,SH”))
Sell1: ticker(“UST,TLT,GLD”) & $YieldCurveHedge_Exit
Sell2: Eval($port_sum<= 3 & $CARP <1.7 , ticker(“RSP,XLK,VIG”), ticker(“UBT,SH”)) & nodays>12