How do I back-test the market by decile?

January 13, 2019

If you are a Builder Plus member, you’ll see the Rank by Decile option on the Strategy’s Edit page. The default setting is Off.

1) Turn it on by clicking the pencil icon and changing the OFF selector to ON:

Once selected, some of the criteria in the Universe section changes. In particular, the Rank Universe (1) and (2) controllers are used to select the metrics to back-test by decile.

2) To back-test by decile, select a metric you want by clicking on the Rank Universe (1) pencil icon. Observer the ‘Universe’ dialogue:

Select Ascending or Descending to order your Rank Metric. This determines which way the market is split into deciles during the back-test. If it is Descending, Decile 1’s will be at the top and Decile 10 will be at the bottom. If it is Ascending, Decile 1’s will be the low values (i.e. the bottom) and Decile 10s the high values (at the top of the ranking).

3) Click on the (N/A ) box to choose your metric from the ‘Single Select’ dialogue:

4) Choose your metric from this list by clicking on the plus button and then the metric. Below you can see we have chosen ‘General – Market Value (In Millions)’ in Descending order. This will back-test the market by company size. As we’ve chosen Descending order, the largest companies will be in Decile 1 while the smallest companies will be in Decile 10. Click OK to save.

If you want to back-test deciles using combined metrics, do the same process as above using Rank Universe (2) then select ‘Yes’ for Combine Rankings:

Above, you can see that we have selected the Australian market and the ‘Rank by Decile’ function is On. We have chosen two metrics to back-test by decile and are combining those metrics. The result will be to split the market into 10 equal parts with the largest companies with the greatest yearly price change in the 1^st Decile and the smallest companies with the lowest yearly price change in the 10^th decile. To see the results save that strategy and select RUN.

You can adjust the ‘Rebalance’ frequency. After the rebalance elapsed time all the stocks in each decile are sold, the engine then re-ranks all the stocks and buys them back again according to the ranked variables. The default rebalance frequency is set to Annual. You can change this by clicking on the icon. You can choose to rebalance each decile either; Quarterly, Semi-annual, Annual, 2-years, 3-years, or 5-years.