Evaluating Investment Performance: The p-index and Empirical Efficient Frontier

ArXiv ID: 2510.11074 “View on arXiv”

Authors: Jing Li, Bowei Guo, Xinqi Xie, Kuo-Ping Chang

Abstract

The empirical results have shown that firstly, with one-week holding period and reinvesting, for SSE Composite Index stocks, the highest p-ratio investment strategy produces the largest annualized rate of return; and for NYSE Composite Index stocks, all the three strategies with both one-week and one-month periods generate negative returns. Secondly, with non-reinvesting, for SSE Composite Index stocks, the highest p-ratio strategy with one-week holding period yields the largest annualized rate of return; and for NYSE Composite stocks, the one-week EEF strategy produces a medium annualized return. Thirdly, under the one-week EEF investment strategy, for NYSE Composite Index stocks, the right frontier yields a higher annualized return, but for SSE Composite Index stocks, the left frontier (stocks on the empirical efficient frontier) yields a higher annualized return than the right frontier. Fourthly, for NYSE Composite Index stocks, there is a positive linear relationship between monthly return and the p-index, but no such relationship is evident for SSE Composite Index stocks. Fifthly, for NYSE Composite Index stocks, the traditional five-factor model performs poorly, and adding the p-index as a sixth factor provides incremental information.

Keywords: Efficient Frontier, p-ratio Strategy, Factor Models, Investment Strategy, Portfolio Optimization, Equities

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Holy Grail
• Why: The paper introduces a novel, option-based risk metric (p-index) with significant theoretical derivation, demonstrating high math complexity. It presents extensive empirical backtesting on multiple indices over a 10-year period with specific return metrics and factor model tests, showing substantial empirical rigor.

  flowchart TD
    A["Research Goal: Evaluate Investment Performance<br>Using p-index & Empirical Efficient Frontier"] --> B["Data/Inputs:<br>SSE & NYSE Composite Indices Stocks"]
    B --> C["Methodology: Apply Investment Strategies<br>Holding Periods (1 wk/1 mo) & Reinvestment Options"]
    C --> D["Computational Processes:<br>Calculate Returns & p-index<br>Construct Empirical Efficient Frontier<br>Apply Five-Factor Model"]
    D --> E["Key Findings/Outcomes:<br>1. Highest p-ratio Strategy dominates for SSE<br>2. NYSE strategies yield negative returns (reinvesting)<br>3. Linear p-index relationship exists for NYSE only<br>4. p-index adds value to Five-Factor Model"]