Starting with Model Portfolio Performance Through 3Q20, we updated the risk-free rate we use to benchmark the performance of the market-neutral long/short strategies based on our Most Attractive & Most Dangerous Stocks Model Portfolios. Going forward, the risk-free rate is based on the 5-year zero-coupon U.S. Treasury rate.
Prior to this update, we used the 3-Month T-Bill as the risk-free rate to benchmark performance of these portfolios.
We also use the 5-year zero-coupon U.S. Treasury rate as the risk-free rate in our Company Valuation Models.
Below, we show how much the switch to the new rate raises the performance of our risk-free benchmark.
First, the cumulative return of the new risk-free rate since 2005 is ~42% through 2Q20, compared to ~22% with the prior rate. See Figure 1.
Figure 1: Cumulative Risk-Free Rate Return: Comparing Prior vs. New Rate
Sources: New Constructs, LLC and company filings.
Note: Gain/Decline performance analysis excludes transaction costs, dividends and rebates.
Next, we compare the annualized rates of return for the prior and new risk-free rates across multiple time frames. See Figure 2.
Figure 2: Annualized Risk-Free Rate Returns: Comparing Prior vs. New Rate
Sources: New Constructs, LLC and company filings.
Note: Gain/Decline performance analysis excludes transaction costs, dividends and rebates. Inception date is January 2005.
This article originally published on November 10, 2020.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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