Strategy Selection in Extreme Markets: Empirical Analysis and Optimization of Portfolio Performance in the French Stock Market

Abstract

This paper uses a two-phase methodology to explore portfolio optimization strategies for stocks in the CAC 40 index during the COVID-19 pandemic. In the first phase, this paper compared the performance of equal-weighted, maximum Sharpe ratio, and equal-weighted risk contribution (EWRC) strategies, using historical data to analyze their performance in eight different market phases. In the second phase, based on the results of the first phase, the maximum Sharpe ratio strategy was found to be the most effective, and was subsequently refined by integrating the 20-day moving average (MA20) as a tactical component. The results showed that the MA20-enhanced maximum Sharpe ratio strategy outperformed other strategies in terms of risk-adjusted return over most of the evaluated time frames. It can therefore see the potential of technical indicators to aid investment decisions, especially in response to rapid market changes. These insights provide valuable guidance for investors strategizing during periods of market uncertainty, highlighting the benefits of dynamic strategy adjustments to volatile market conditions.