S&P 500 Top 500 Volume Stocks Power Equal-Weight Strategy vs. SPY in Back-Test

Universe Clarification

The universe should be restricted to S&P 500 constituents to ensure focus on large-cap, liquid U.S. equities. ADRs (American Depositary Receipts), ETFs, and penny stocks (price < $5) should be excluded to avoid distortions from non-traditional securities, illiquidity, or volatility unrelated to core market dynamics. This aligns with standard back-test practices for robustness and relevance to institutional or retail strategies targeting broad-market exposure.

Trading Convention Confirmation

• Entry/Exit Timing: Buy at the day’s close and exit at the next day’s close (one-day holding period). This minimizes overnight risk and aligns with intraday trading strategies.
• Position Sizing: Equally weighted positions (0.2% of capital per stock in the top 500 by volume) to ensure diversification and mitigate overexposure to individual stocks.
• Transaction Costs: Include 1 basis point (0.01%) per trade for both entry and exit to account for slippage and execution costs. This is a conservative estimate for institutional-level trading in liquid stocks.

Benchmark and Performance Metrics

• Benchmark: Use SPY (SPDR S&P 500 ETF Trust) as the primary benchmark to compare the strategy’s performance against the broader market.
• Risk-Free Rate: Reference the latest 10-year U.S. Treasury yield (assume ~4.2% as of 2025) for excess return calculations and Sharpe ratio computations.
• Metrics to Track: Gross return, annualized Sharpe ratio, maximum drawdown, and drawdown duration. Include a performance attribution table to highlight the strategy’s alpha generation relative to SPY.

With these parameters confirmed, the back-test can proceed. The daily trading signals will be generated based on the top 500 S&P 500 constituents by volume (excluding ADRs/ETFs/penny stocks), with equal weighting and 1-basis-point transaction costs. Performance will be benchmarked against SPY and evaluated using the specified metrics.