Risk-Adjusted Returns in S&P 500 with Long-Only Cross-Sectional Momentum Strategy

Cross-sectional momentum has been used widely, but there are few researches to find the impact of portfolio concentration to long-only momentum strategy. This Paper examines how varying the number of stocks affects the performance of long-only momentum strategy in S&P 500 universe from 2000 to 2026. This study uses the standard 12-month period and skip the recent month to filter out the microstructure noises. Through picking the top n historical winners, the results show a significant balance between risk and return. Considering that evidence indicates that concentrated portfolios carry distinct trade-offs, a highly concentrated portfolio may have the highest return but also the risk of large drawdowns and elevated volatilities. However, the study may indicate that when the size of portfolio increases to n=6, the strategy could reach the optimal balance between the momentum premium and the diversification benefits. Additionally, this strategy reaches the highest Sharpe Ratio of 1.04 and shows a significant alpha of 30.84%. Therefore, these findings show that for the institutional investors who use long-only strategies, mechanically picking the extreme winners is not the best option, rather, changing the portfolio to a proper size may be the key to maximize the risk-adjusted returns.