Creating Superior Investment Portfolios

30 Pages Posted: 24 May 2017 Last revised: 6 Nov 2018

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

Date Written: November 5, 2018

Abstract

Recent work by Liu, Kolari, and Huang (2018) proposed a new asset pricing model dubbed the ZCAPM based on market and return dispersion factors. Applying the ZCAPM, we construct investment portfolios with different levels of return dispersion sensitivity. For U.S stock returns in the sample period 1965 to 2015, zero-investment portfolios 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 standard deviations of returns, 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. We conclude that return dispersion enables the creation of superior 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, Creating Superior Investment Portfolios (November 5, 2018). 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 ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
332
rank
86,160
Abstract Views
1,082
PlumX Metrics