{"id":367,"date":"2023-08-14T17:07:48","date_gmt":"2023-08-14T15:07:48","guid":{"rendered":"https:\/\/marketadvisor.io\/blog\/?p=367"},"modified":"2023-08-15T08:33:48","modified_gmt":"2023-08-15T06:33:48","slug":"stock-market-creating-a-better-cac40-index-300","status":"publish","type":"post","link":"https:\/\/marketadvisor.io\/blog\/stock-market-creating-a-better-cac40-index-300\/","title":{"rendered":"Stock Market – Creating a better CAC40 index (+300%)"},"content":{"rendered":"\n

We often hear that it is hard to beat the market, but what is the market ? Should we consider S&P500 as the better performance we can achieve in stock investment. But if we look at an index for what it is, a portfolio of different companies, could we apply the portfolio management<\/a> theory<\/strong>? In this article, let’s try to recreate a better CAC40 (French index) where we use the Efficient Frontier<\/a> to ponderate differently the CAC40.<\/p>\n\n\n\n

What is an Index like CAC40 ? <\/h2>\n\n\n\n

CAC40, SP500, DAX30 are what we call an index. They are often linked to a country as a representation of the economic performance of a country. But in reality, the definition is simple (even if the interpretation could be more complex). The only thing we need to know is that an index (such as CAC40) represents a portfolio of 40 companies from France<\/strong>. If you buy 1 share of the CAC40<\/strong>, you invest in 40 different companies with different weights.<\/p>\n\n\n\n

We choose the CAC40 instead of the SP500 because only 40 different stocks make up the index. First of all, we need to extract the historical price for each asset. The longer the better, but we can only go back 3500 days in the past<\/strong>.<\/p>\n\n\n\n

We’ll start at day 0 and create the table for the daily return (%):<\/strong><\/p>\n\n\n\n

Day<\/strong><\/td>AI<\/strong><\/td>AIR<\/strong><\/td>ALO<\/strong><\/td>…<\/td><\/tr>
0<\/td>-1.8%<\/td>0.57%<\/td>-0.4%<\/td>…<\/td><\/tr>
1<\/td>1.3%<\/td>0.21%<\/td>1.07%<\/td>…<\/td><\/tr>
2<\/td>2%<\/td>0.23%<\/td>1.11%<\/td>…<\/td><\/tr><\/tbody><\/table>
Daily Return for all asset in CAC40<\/figcaption><\/figure>\n\n\n\n

Once the daily return is calculated for day 0 through day 1750, we use half of the data to find a optimisation and the rest to test our model.<\/p>\n\n\n\n

Search for correlated companies within CAC40<\/h2>\n\n\n\n

Based on the daily return, we can create a covariance matrix that represents the correlation between two assets. The purpose is easy to understand. When you look at a portfolio, in order to avoid risk, we try to balance the portfolio. So it’s important to know which assets are highly correlated because they may represent the same risk.<\/p>\n\n\n\n

For example, if we take the asset BNP (BNP Paribas – Bank), it shows a high correlation with 2 other assets GLE (Soci\u00e9t\u00e9 G\u00e9n\u00e9ral – Bank) and ACA (Cr\u00e9dit Agricole – Bank).<\/p>\n\n\n\n

Minimize our Risk\/Benefits Ratio<\/h2>\n\n\n\n

Imagine for a moment that our index is made up of 4 companies: 3 banks and 1 car manufacturer. The first calculation shows that<\/p>\n\n\n\n