Applicability and Risk-Return Analysis of the Dumbbell Strategy in the Chinese Market

Based on my analysis of existing research materials and market data, I will systematically answer your questions about the applicability of the dumbbell strategy in the A-share market and its Sharpe Ratio performance.

The dumbbell strategy is an investment portfolio construction method whose core idea is to allocate funds to two extreme asset classes while

allocation [1]. In the equity investment field, this strategy usually manifests as:

• One end
  : Allocate defensive assets with high certainty, high dividends, and low volatility (e.g., banks, utilities, high-dividend blue chips)
• The other end
  : Allocate offensive assets with high growth and high volatility (e.g., AI, semiconductors, new energy and other tech growth stocks)
• Avoid
  : Medium-risk, medium-return “mediocre assets”

The theoretical support for this strategy includes [1]:

• Convexity effect
  : Through an extreme asset portfolio, asymmetric returns can be obtained in different market environments
• Volatility diversification
  : The correlation between the two ends of assets is usually low, which can effectively diversify portfolio risks
• Liquidity advantage
  : Short-term assets provide liquidity, while long-term assets enhance returns

According to the latest market research, many institutional investors have adopted the dumbbell strategy in Hong Kong stocks and A-shares to balance portfolio risks, allocating both high-dividend assets and leading tech growth stocks [4]. The specific allocation directions recommended by institutions are:

• Defensive end
  : Finance, non-ferrous metals and other high-dividend blue chips
• Offensive end
  : AI, high-end manufacturing and other tech growth leaders [4]

This strategy is highly aligned with China’s current

:

• Traditional industries provide stable cash flow and dividend income
• Emerging tech industries offer long-term growth potential

From historical data, the A-share market indeed has

:

• The annual volatility of the A-share market is significantly higher than that of developed markets
• In high-volatility environments, traditional balanced allocation strategies often struggle to achieve ideal Sharpe ratios
• The dumbbell strategy, through two-end allocation, can obtain better risk-adjusted returns in volatile markets

The formula for Sharpe Ratio is [2]:

Where:

• Rp = Expected return of the portfolio
• Rf = Risk-free rate
• σp = Standard deviation (volatility) of the portfolio

means:

• For every unit of risk taken, more than one unit of excess return is obtained
• It belongs to excellent risk-adjusted return performance

Based on investment theory and Chinese market characteristics, I believe that

:

• Recommended experience ratio:
  50% defensive end +50% offensive end
  or dynamic adjustment according to market environment
• Defensive end: Annual return target of 6-8%, volatility of10-15%
• Offensive end: Annual return target of15-25%, volatility of25-40%

The key to the dumbbell strategy achieving a high Sharpe Ratio lies in the between the two ends of assets. In the A-share market:

• The correlation between high-dividend assets (banks, utilities) and tech growth stocks is usually low
• They complement each other in different economic cycles: the defensive end is stable in economic downturns, and the offensive end bursts in economic upturns

• Dynamic adjustment
  : Adjust the proportion of the two ends according to market valuation and macro environment
• Regular rebalancing
  : When one end rises too much, properly take profits and increase holdings of the undervalued end
• This active management can significantly improve the risk-adjusted return of the portfolio

Assume the following dumbbell portfolio is constructed:

• 50% high-dividend blue chips
  : Expected annual return of8%, volatility of12%
• 50% tech growth stocks
  : Expected annual return of20%, volatility of30%
• Correlation coefficient
  :0.3 (moderate correlation between the two ends of assets)

Portfolio expected return =0.5×8% +0.5×20% =

Portfolio volatility = √(0.5²×12² +0.5²×30² +2×0.5×0.5×0.3×12×30) ≈

Assuming the risk-free rate is 3%:

This simulation result shows that a simple 50/50 allocation

.

###3. Key Strategies to Improve Sharpe Ratio

To achieve

, the following advanced strategies are needed:

####(1) Optimize Allocation Ratio
Determine the optimal ratio through the mean-variance optimization model. Experience shows that in the A-share environment, it may be necessary to

(e.g., 60/40 or70/30) to reduce portfolio volatility.

####(2) Select High-quality Stocks

• Defensive end
  : Choose high-quality companies with stable ROE, high dividend yield, and reasonable valuation
• Offensive end
  : Choose industry leaders with core competitiveness and strong growth certainty
• Stock selection has
  far greater impact
  on the Sharpe Ratio than allocation ratio

####(3) Application of the “10/40/50” Cognitive System
The

you mentioned is the key to achieving a high Sharpe Ratio:

• Stock selection accounts for 10%
  : Select truly high-quality targets
• Betting strategy and fund management account for40%
  : Control risks through reasonable position management, stop-loss and take-profit, and batch position building
• Psychology accounts for50%
  : Maintain rationality, avoid chasing ups and downs, be greedy when the market is panicking, and panic when the market is greedy

##4. Risks and Challenges of the Dumbbell Strategy

###1. Main Risks

• Timing risk
  : If you build positions in the offensive end at high points, you may face large retracements
• Style drift
  : When the market style is extreme, one end may underperform for a long time
• Management difficulty
  : Requires continuous tracking and dynamic adjustment, with high professional requirements for investors

###2. Special Challenges in the Chinese Market

• Policy risk
  : A-shares are greatly affected by policies, especially tech stocks
• Liquidity risk
  : Some growth stocks have insufficient liquidity, making it difficult to increase or decrease positions
• Valuation volatility
  : A-share valuation volatility is large, requiring stronger psychological resilience

##5. Practical Recommendations for Achieving Sharpe Ratio >1.0

Based on the above analysis, to achieve a Sharpe Ratio >1.0 through the dumbbell strategy in the high-volatility A-share environment, it is recommended:

###1. Portfolio Construction Principles

Defensive side (40-60%):
- Banks (high dividend, low valuation)
- Utilities (stable cash flow)
- Consumer leaders (brand moat)

Offensive side (40-60%):
- AI industry chain (computing power, applications)
- High-end manufacturing (semiconductors, new energy)
- Innovative medicine (R&D breakthroughs)

###2. Dynamic Management Rules

• Valuation trigger
  : When the average PE of the offensive end exceeds the historical 80th percentile, reduce the allocation to30%
• Retracement control
  : The maximum retracement of a single stock does not exceed 20%, and the overall portfolio retracement does not exceed15%
• Rebalancing frequency
  : Quarterly or semi-annual rebalancing to avoid over-trading

###3. Risk Management

• Maximum retracement limit
  : Set a maximum retracement red line of15-20%
• Position management
  : A single stock does not exceed10%, and a single industry does not exceed30%
• Hedging tools
  : Properly use stock index futures or options to hedge systemic risks

##6. Conclusion

###Core Views

1. The dumbbell strategy has high applicability in the A-share market
   , which aligns with the current economic transformation and structural market characteristics

2. Achieving a Sharpe Ratio >1.0 is possible but challenging
   . It requires:
   • Selecting high-quality stocks (stock selection ability)
   • Scientific fund management and betting strategy (40% weight)
   • Strong psychological quality and discipline (50% weight)

3. The core of success lies not in the strategy itself, but in execution
   . As your “system guardian” concept mentions, the core competitiveness of investment lies in:
   • In-depth understanding of the nature of business
   • The determination to integrate knowledge and action
   • Systematic risk management

4. In the AI era, information collection is no longer the core competitiveness
   . The real advantages lie in:
   • How to process and interpret information
   • How to build and execute systems
   • How to manage one’s own psychology and behavior

###Implementation Path

If you want to achieve a Sharpe Ratio >1.0 through the dumbbell strategy, it is recommended:

1. Build a quantitative system
   : Regularize and systemize stock selection, allocation, and rebalancing rules
2. Strictly implement discipline
   : Avoid emotional decisions and adhere to established rules
3. Continuously optimize and iterate
   : Review regularly and adjust strategy parameters according to market changes
4. Manage psychological expectations
   : Accept short-term volatility and focus on long-term compound interest

---

##References

[0] Jinling API Data (A-share market data, investment strategy analysis)
[1] Investopedia - “Understanding the Barbell Investment Strategy: High-Risk and Safe Assets” (https://www.investopedia.com/articles/investing/013114/barbell-investment-strategy.asp)
[2] Investopedia - “Sharpe Ratio: Definition, Formula, and Examples” (https://www.investopedia.com/terms/s/sharperatio.asp)
[3] Yahoo Finance Hong Kong - “Buy More as It Drops! HK Stock Low Valuation Triggers Frenzy, Southbound Funds Swept This Year…” (https://hk.finance.yahoo.com/news/越跌越買-港股低估值引爆資金瘋搶潮-南向資金今年來狂掃近兆港元創紀錄-023544705.html)
[4] Yahoo Finance Hong Kong - “Shanghai Composite Breaks 3900 Points Again After Decade! Chinese Assets Are Chased During National Day & Mid-Autumn Long Holiday…” (https://hk.finance.yahoo.com/news/滬指睽違十年再漲破3900點-中國資產在國慶中秋長假期間受追捧-科技股前景被看好-023013709.html)
[5] Wall Street Journal - “SHCOMP.CN | Shanghai Composite Index Stock Prices and Charts” (https://www.wsj.com/market-data/quotes/index/CN/SHCOMP/)
[6] Yahoo Finance Hong Kong - “Worried About US Stock Bubble? Study Shows Growth Stocks’ ROE Far Exceeds Value Stocks to Support High Valuations” (https://hk.finance.yahoo.com/news/擔心美股泡沫-研究顯示-成長股roe遠勝價值股-有助支持高估值-071442350.html)
[7] Bloomberg - “2025 Index Outlook: Stocks” (https://www.bloomberg.com/tc/blog/indices-2025-outlook-equity/)