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Exploiting Information From Analyst Target Prices Using Portfolio Optimization

Groen, J (2020) Exploiting Information From Analyst Target Prices Using Portfolio Optimization.

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Abstract:This thesis studies the investor portfolio selection problem. I examine whether a risk-averse investor can use information from consensus target prices, issued by financial analysts, in the construction of the portfolio weights. The weights of the portfolio are directly estimated as a function of the security’s characteristics through optimizing the average utility that the investor would have obtained over the sample period. I find that the investor can in fact exploit analyst information through consensus target prices. The target price implied return and target price implied dispersion are informative to investors and provide new information not yet captured by traditional variables. I empirically show the investor can use this information to construct a portfolio that provides robust out-of-sample performance. The investor deviates from the market portfolio and optimally overweighs firms that have greater target price implied returns and underweights firms with a large dispersion in target prices. By doing so the investor obtains an economically and statistically significant alpha of 310bps (280 bps) over the value-weighted (equal-weighted) benchmark portfolio. Moreover, the portfolio obtains an economically and statistically significant alpha of 240bps a month, over the portfolio that only includes the traditional characteristics identified by literature such as size, book-to-market, momentum, investment, and profitability. The results remain robust even after controlling for the Fama-French-Carhart risk-factors. The results are not completely spanned by the Fama-french-Carhart factors indicating that returns are not fully explained by exposure to the well-known risk factors.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/85404
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