Analysing Portfolios of Financial and Nonfinancial Stocks Using a Single Factor Model

30 Pages Posted: 13 Oct 2017 Last revised: 7 Apr 2019

See all articles by James Foye

James Foye

University of Ljubljana

Aljosa Valentincic

University of Ljubljana - Faculty of Economics

Date Written: March 1, 2019

Abstract

We develop an alternative factor model to determine the required rate of return by replacing the HML factor with a dividend-based alternative. Traditional factor models cannot be applied to portfolios diversified across the financial and nonfinancial sectors. We offer a resolution to this problem. Our empirical analysis of UK-listed stocks shows that even though the new model is estimated using only nonfinancial firms it can explain returns on portfolios of both nonfinancial and financial firms. As financials constitute a substantial proportion of an investor’s opportunity set, this represents a more practical model for factor-based investing.

Keywords: asset pricing, dividends, multifactor models, CAPM, Fama-French model, performance evaluation

Suggested Citation

Foye, James and Valentincic, Aljosa, Analysing Portfolios of Financial and Nonfinancial Stocks Using a Single Factor Model (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3051173 or http://dx.doi.org/10.2139/ssrn.3051173

James Foye (Contact Author)

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

Aljosa Valentincic

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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