A New Investment Technology: The ZCAPM

31 Pages Posted: 24 May 2017 Last revised: 3 Apr 2019

See all articles by Wei Liu

Wei Liu

Texas A&M University - Department of Finance

James W. Kolari

Texas A&M University - Department of Finance

Jianhua Huang

Texas A&M University - Department of Statistics

Date Written: March 1, 2019

Abstract

This paper constructs portfolios of stocks with superior investment performance relative to a general market index. Portfolios are formed with different levels of sensitivity to cross-sectional return dispersion among all stocks in the market. We find that, for U.S stock returns in the period 1965 to 2015, zero-investment port-folios that are long positively sensitive stocks and short negatively sensitive stocks earn as much as 2.67 percent per month on average. Further analyses combine these long/short portfolios with the CRSP index to show that superior aggregate indexes can be constructed that take into account return dispersion sensitivity. For example, given similar total risk as measured by the standard deviation of returns over time, our aggregate index earns approximately 1.50 percent per month compared to 0.89 percent for the CRSP index, thereby boosting performance by about 70 percent. Based on these and other results, we conclude that return dispersion enables the creation of high performing investment portfolios.

Keywords: Investment Portfolios, Market Index, Return Dispersion

JEL Classification: C30, G11, G12

Suggested Citation

Liu, Wei and Kolari, James W. and Huang, Jianhua, A New Investment Technology: The ZCAPM (March 1, 2019). Mays Business School Research Paper No. 2885467. Available at SSRN: https://ssrn.com/abstract=2885467 or http://dx.doi.org/10.2139/ssrn.2885467

Wei Liu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Jianhua Huang

Texas A&M University - Department of Statistics ( email )

155 Ireland Street
447 Blocker
College Station, TX 77843
United States

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