[R] Return Misalignment in Return.portfolio function in PerformanceAnalytics Package

[Suphajak Ngamlak]

Dear R users,



I am trying to calculate NAV of portfolio using Return.portfolio function in PerformanceAnalytics Package. I am having difficulties with how I should specify weight in the function.

I tried to replicate using fixed weights with rebalance_on = "months" by specifying weights explicitly. However, the returns I got were different



Below is the example of the code



# clear memory



rm(list=ls())



library(quantmod)

library(PerformanceAnalytics)



symbols = c(

  "SPY", # US equities, SP500

  "AGG"  # US bonds, Barclay Agg

)

getSymbols(symbols, from="1970-01-01" , to="2014-09-15")

x.P <- do.call(merge, lapply(symbols, function(x) {

  Cl(to.monthly(Ad(get(x)), drop.time = TRUE,

                indexAt='endof'))

}))

colnames(x.P) = paste0(symbols, ".Adjusted")

x.R <- na.omit(Return.calculate(x.P))



# Create a weights vector

w = c(.6,.4) # Traditional 60/40 Equity/Bond portfolio weights



# Create monthly weight

w_mon = x.R[endpoints(x.R, on="months")]

w_mon$SPY.Adjusted = 0.6

w_mon$AGG.Adjusted = 0.4



# Rebalance back to 60/40 proportion

result.months1 = Return.portfolio(x.R, weights=w, rebalance_on = "months", verbose=TRUE)

result.months2 = Return.portfolio(x.R, weights=w_mon, verbose=TRUE)



test1 = data.frame(BOP = result.months1$BOP.Value, EOP = result.months1$EOP.Value, Ret = x.R)

test2 = data.frame(BOP = result.months2$BOP.Value, EOP = result.months2$EOP.Value, Ret = x.R)



# Show input and result



w

head(w_mon)



head(test1)

head(test2)



> w

[1] 0.6 0.4

> head(w_mon)

           SPY.Adjusted AGG.Adjusted

2003-10-31          0.6          0.4

2003-11-28          0.6          0.4

2003-12-31          0.6          0.4

2004-01-30          0.6          0.4

2004-02-27          0.6          0.4

2004-03-31          0.6          0.4

>

> head(test1)

           BOP.SPY.Adjusted BOP.AGG.Adjusted EOP.SPY.Adjusted EOP.AGG.Adjusted Ret.SPY.Adjusted Ret.AGG.Adjusted

2003-10-31        0.6000000        0.4000000        0.6321161        0.3962610       0.05352682     -0.009347612

2003-11-28        0.6170262        0.4113508        0.6237648        0.4127263       0.01092112      0.003343882

2003-12-31        0.6218947        0.4145965        0.6531841        0.4186563       0.05031296      0.009792217

2004-01-30        0.6431042        0.4287361        0.6558184        0.4306248       0.01976999      0.004405247

2004-02-27        0.6518659        0.4345773        0.6607121        0.4395380       0.01357061      0.011414925

2004-03-31        0.6601501        0.4401000        0.6514060        0.4431095      -0.01324559      0.006838188

> head(test2)

           BOP.SPY.Adjusted BOP.AGG.Adjusted EOP.SPY.Adjusted EOP.AGG.Adjusted Ret.SPY.Adjusted Ret.AGG.Adjusted

2003-10-31        0.6000000        0.4000000        0.6065527        0.4013376       0.05352682     -0.009347612

2003-11-28        0.6047341        0.4031561        0.6351601        0.4071039       0.01092112      0.003343882

2003-12-31        0.6253584        0.4169056        0.6377217        0.4187422       0.05031296      0.009792217

2004-01-30        0.6338783        0.4225856        0.6424804        0.4274093       0.01976999      0.004405247

2004-02-27        0.6419339        0.4279559        0.6334311        0.4308824       0.01357061      0.011414925

2004-03-31        0.6385881        0.4257254        0.6265051        0.4137777      -0.01324559      0.006838188



We can see that even though test1 (from using rebalance_on) and test2 (from specifying weight) showed the same Ret.SPY.Adjusted and Ret.AGG.Adjusted.

The return that test 2 used in calculating EOP was from the next period. For example, for test2, EOP.SPY.Adjusted on 2003-10-31 (0.6065527) = BOP.SPY.Adjusted on 2003-10-31 (0.6000000) * Ret.SPY.Adjusted on 2003-11-28 (1+0.01092112)

Could you please suggest how should I set weight to get the same result as in test1?





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