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Quantitative Portfolio Strategies: Beyond traditional theory? Low-risk as a useful factor for the construction of an equity portfolio

Bekker, M. (2014) Quantitative Portfolio Strategies: Beyond traditional theory? Low-risk as a useful factor for the construction of an equity portfolio.

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Abstract:The goal of this master’s thesis is to improve the SNS Euro Equity Fund’s current quantitative investment strategy by adding a low-risk factor. The purpose of this factor is to capture stocks with low-risk characteristics that deliver superior future expected stock returns. However, traditional finance principles assume that the stock market is efficient and that investors are rational and risk averse. Logically, this should result in a higher return for a more risky investment in equilibrium. Contrary to this intuitive reasoning, we provide convincing empirical evidence that low-risk stocks lead to considerable stronger future share price performance than high-risk stocks. The absolute returns of low-risk portfolios are substantially higher than those of high-risk ones. Moreover, their risk-adjusted returns statistically significantly outperform the risk-adjusted returns of high-risk portfolios in the long-run, regardless of whether we define risk as Conditional Value at Risk or historical volatility. This outperformance cannot be fully explained by the exposure to market risk and the current quantitative investment strategy of SNS Euro Equity Fund, therefore, adding a low-risk factor to this strategy seems worth considering. Additionally, we can conclude that the future expected performance of both the momentum and value strategy can be improved substantially by adding a low-risk factor, however, the effectiveness of the value strategy itself is debatable. To conclude, our results indicate that it is valuable to add a low-risk factor to the current quantitative investment strategy of SNS Euro Equity Fund in order to improve the expected future performance of an equity portfolio.
Item Type:Essay (Master)
Clients:
SNS Asset Management, Utrecht, the Netherlands
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/64670
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