The Monkey Portfolio — Can Monkeys Beat the Market?

by Tom Starke

Can Monkeys beat the market? Much has been discussed about the famous “Monkey Portfolio” where a monkey throws darts at a board with stock tickers and the resulting portfolio outperforms the underlying benchmark. Obviously, it is a very bold proposition and I couldn’t resist putting it to the test myself. Quite frankly, I have no doubt that this is actually true, I was more interested in HOW true it is, and can we possibly derive a credible trading strategy from that?

It reminds me of the infamous “spooky action at the distance” aka “entanglement” in quantum physics where there is an obvious, experimentally verified, connection between elementary particles across large distance (even across the universe), but unfortunately, it cannot be exploited for transmission of information faster than the speed of light.

Another question that has yet to be answered conclusively is the reason for this inefficiency. I will draw my own, humble conclusions further down.

Constructing the dataset

Before starting to look at the simulations, let’s have a quick look at how the dataset was constructed. Wikipedia provides a page with the current components of the S&P 500 and also provides a list of the changes all the way back to 2000. With that…