Trading Strategies and their Impact on the Wealth of Investors: From an Asset Pricing Perspective

Morten E. Jensen

Studenteropgave: Kandidatafhandlinger

Abstract

In this thesis a model will be developed to explain how a constrained economy works. The predictions of the model is that in a constrained economy: Securities with high beta values will earn a lower alpha than securities with low beta values. And this insight would lead to the next prediction that an investor would a positive expected return in a market-neutral self-financed portfolio that bets against the beta by shorting a portfolio of large beta securities to finance a portfolio of small beta securities.
The empirical test showed that the predictions were correct. Both Sharpe ratio and alpha had an inverse relationship with the beta of a portfolio. The constructed BAB factor portfolios earned both positive returns and abnormal returns.
The rational investor would have invested all her wealth plus her possible margin in the BAB78 portfolio and earned an monthly alpha of 1.78%. Her construction of this BAB78 portfolio would be to short a delevered beta-weighted portfolio of the 78 securities with the largest betas to finance a levered beta-weighted portfolio of the 78 securities with the smallest betas.

UddannelserCand.merc.fin Finance and Investments, (Kandidatuddannelse) Afsluttende afhandling
SprogEngelsk
Udgivelsesdato2017
Antal sider46
VejledereClaus Munk