Leveraging Stocks in India

We are running a small portfolio of Indian stocks to examine performance with our technology, which uses a modification of the Kelly Criterion (See AugurMax for details). The above table shows the past performance of those stocks. Without some type of shorting of the stocks, the solutions using Kelly will underperform their potential. I bring this issue up now especially because of the new margin requirements by SEBI coming into force by this September. They will require margin limits based upon calculations of VaR (Value at Risk) and ELM (Extreme Loss Margin). There is an equity margin calculator at NSE . Estimates for CPSEETF (done along with the above table by my colleague Robert Shumaker) give a margin value of about 14% suggesting considerable leverage is possible. However, we have seen no official ways to calculate this value for a portfolio. Perhaps they apply only to individual stock purchases in which case they will be more excessive than would otherwise be necessary for a portfolio.

We suppose now we cannot short the stocks or do not want to short the individual stocks given in the above table. So we buy them under margin. We calculate the asset allocation on May 1 and run the portfolio of the stocks to end of May 2021 allowing a 20% margin that we simulate by shorting the overnight rate. The result is the following:

The initial holdings were 20 in each stock, bond, and gold and transaction costs are applied. As you can see, the additional holdings were leveraged up with 20% margin. We get an additional 80 (buys minus sells) based upon a net valuation of 100 (holdings minus shorts with slight adjustments for transaction costs). The result gives the month of May return of 10.32% against a max of 7.9% for NiftyCPSE from the table.

Of course, you must be cautious when buying on margin. The portfolio takes that caution by applying our bubble and crash mitigation technology ECO within AugurMax. We measure the ongoing ECO performance of a number of stocks at ECO Performance . Suggestions for additions are welcomed as we plan to include Bitcoin and some others to be decided.

Comments on the approach here are welcomed especially as relates to stocks in India.