A General Intelligent Portfolio Theory with Strength Investing and Sector Rotation in Stock Markets

Abstract

This paper walks through mathematical evolution of modern portfolio theory and multi-factor models and advances with a General Intelligent Portfolio Theory and underlying applications in stock markets. Following up the earlier form of the Intelligent Portfolio Theory, the new generalization extends in 3 dimensions: 1) three forms of intelligent portfolios – multi-asset multi-strategy, multi-strategy multi-asset and multi-trader; 2) strength investing with momentum rotation as an engine driving dynamic re-selection of assets or strategies or traders; 3) sector rotation in stock markets as a main form of strength investing and as a paradigm shift from diversification in portfolio theory. Applications in Chinese stock markets and international index futures are demonstrated with nontrivial performance achieved through testing on historical data.