Why are Few Mid-Cap And Small-Cap Stocks Included in Large-Cap Alpha Portfolio?

Alpha Portfolios are diversified portfolios. Though, the US stock market in particular have many listed large-cap companies. However, diversification becomes difficult. If Spotalpha’s algorithms are not able to generate an optimised portfolio using only large-cap stocks then they screen mid-cap and small-cap stocks as well to look for probable candidates that can improve overall risk-adjusted returns of the large-cap portfolio.

Why is diversification important?

Take a look at the following chart showing the performance of an optimised portfolio generated using Spotalpha’s US Portfolio Optimiser, in comparison to it’s constituents.

In the above chart you can see that Spotalpha’s optimised portfolio, represented by the orange line, generated almost the same performance as the best performing stocks in the portfolio but by taking significantly less risk (volatility or choppiness).

The goal of Alpha Portfolios is to reduce risk and improve returns in comparison to the benchmark index. If large-cap companies are not found suitable to build a diversified portfolio, Spotalpha’s algorithms sometimes include mid-cap and small-cap stocks in the US large-cap Alpha Portfolio.

Useful Links:
US Large-Cap Alpha Portfolio
How to Use Large-Cap Alpha Portfolio (YouTube)