Quantitative Portfolio Management
Essay by 思辰 周 • March 24, 2017 • Essay • 2,548 Words (11 Pages) • 1,247 Views
Corporate Finance & Asset Valuation
MFIN7005C
Quantitative Portfolio Management
December 15. 2016
Part 1: Introduction
Benjamin Graham and David L. Dodd’s trading strategies of “Value Investing” introduced in the book “Security Analysis” have been widely used by investors for decades. One of the major principles of investment discussed in the book is to analyze earnings and asset values of a company to before deciding particular trading rules. To investigate Graham and Dodd’s trading strategy, Chan, Hamao and Lakonishok investigated the average monthly returns for portfolios in Tokyo stock exchange from 1971 to 1988; the study indicated a positive relationship of realized return with both non-negative Earning-to-Price ratio and Book-to-Market price ratio.
The main objective of this project is to use “Backtesting” methodology to investigate the Earning-to-Price effect and Book-to-Market effect in the Hong Kong stock market, and to examine whether the trading strategies of “Value Investing” proposed in the book work in the Hong Kong stock market.
Part 2: Methodology
We would use “Backtesting” as a major methodology to investigate the Earning-to-Price effect and Book-to-Market effect in the Hong Kong stock market from 1981 to 1995.
For the analysis of Earning-to-Price effect, we form portfolios by E/P ratios at least 6 months after the fiscal year end for the accounting figure. Each year, we construct 0th portfolio by stocks with Non-positive Earning-to-Price ratio, and construct 1st to 5th portfolios by stocks with smallest to largest Earning-to Price ratio. Assuming that each portfolio has equal weightings for its constituent stocks, we calculate and compare the realized return of the 1st portfolio and 5th portfolio. The same process would be repeated throughout 1981 to 1995.The same methodology would also be applied to the analysis of Book-to-Market value effect.
The observations and analysis of the relationships between portfolios realized returns and E/P, B/M ratios would be discussed in the project. The limitations of methodology and suggestions on related trading strategies would also be presented in the last part of the project.
Part 3: Observations & Analysis of Relationship Between Realized Return and E/P, B/M Ratio
3.1 Earnings-to-Price Ratio and Realized Return.
Year | Lowest E/P | Highest E/P | Difference | Lowest B/M | Highest B/M | Difference |
(1) | (2) | (3)=(2)-(1) | (4) | (5) | (6)=(5)-(4) | |
1981 | -10.36% | 34.51% | 44.86% | -33.79% | 27.30% | 61.09% |
1982 | -27.01% | 14.71% | 41.72% | -6.55% | -6.50% | 0.05% |
1983 | 33.49% | 33.57% | 0.08% | 51.60% | 30.43% | -21.17% |
1984 | 51.49% | 98.90% | 47.41% | 64.27% | 84.40% | 20.13% |
1985 | 10.69% | 36.11% | 25.43% | 20.74% | 78.36% | 57.62% |
1986 | 131.29% | 177.10% | 45.81% | 71.57% | 166.84% | 95.28% |
1987 | -3.11% | 29.99% | 33.10% | 19.30% | 32.81% | 13.51% |
1988 | -5.81% | -1.47% | 4.33% | -19.02% | -7.96% | 11.06% |
1989 | 84.23% | 89.70% | 5.47% | 70.83% | 120.89% | 50.06% |
1990 | -15.66% | 1.59% | 17.25% | -8.52% | 3.91% | 12.44% |
1991 | 73.03% | 47.00% | -26.02% | 29.14% | 67.80% | 38.66% |
1992 | 72.65% | 65.09% | -7.47% | 16.18% | 81.91% | 65.73% |
1993 | -5.04% | 2.25% | 7.28% | 2.75% | 9.57% | 6.81% |
1994 | -14.16% | -17.10% | -2.94% | -11.93% | -14.08% | -2.15% |
1995 | 5.03% | 8.82% | 3.79% | 16.88% | 8.02% | -8.86% |
Average | 25.34% | 41.38% | 16.03% | 18.90% | 45.58% | 26.68% |
Table 3-1:Average Realized Return of Highest/Lowest E/P and B/M from 1981 to 1995
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