CAPE-based Portfolio Rotation Strategy : Can Expanding Market Granularity Lead to Increased Performance / Luca STANZANI GHEDINI

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CAPE-based Portfolio Rotation Strategy : Can Expanding Market Granularity Lead to Increased Performance / Luca STANZANI GHEDINI

Study and report

STANZANI GHEDINI, Luca. Author

Published by ESCP Business School - 2021

Library: Madrid London Paris Champerret Paris Montparnasse Turin

Source : Syracuse

Item type

Study and report

Dissertation

MIM Master in Management Grande Ecole

Language

English

Publication year: 2021

Subjects: ASSETS - PER - FINANCIAL ANALYSIS - PROFITABILITY - STOCK EXCHANGE - STOCK EXCHANGE SECURITY - PORTFOLIO MANAGEMENT - PORTFOLIO ANALYSIS - CURRENT ASSETS

Geographical area: GENERAL

The research below provides evidence supporting the idea that the performance of an equally weighted long-short portfolio rotation strategy based on the relatively adjusted CAPE ratio is improved by increasing the market granularity of the asset universe in which the strategy is applied. By increasing the granularity of the asset universe from 9 sectors to 24 industries, the annualized performance of the portfolio strategy increases from 2.8% to 3.2%. Furthermore, the annualized alpha from the Fama-French-Carhart model associated with the 9 sector portfolio strategy is 3.1% while the alpha of the 24 industry portfolio is 3.6%. By considering 24 industries, the portfolio is able to strike a balance between an increased number of assets to be identified as relatively under- or overvalued and the comparability of assets included over the period of time taken under study.