Optimal Fundamental Investing
42 Pages Posted: 27 Dec 2018 Last revised: 13 Jul 2019
Date Written: July 12, 2019
We show how fundamental analysis can be seamlessly integrated with mean-variance portfolio optimization to construct stock portfolios. We find that fundamental analysis combined with mean-variance portfolio optimization yields substantial improvements in portfolio performance relative to portfolios constructed using alternative approaches examined in prior research. Both long-short and long-only optimal fundamental portfolios produce large out-of-sample CAPM and factor alphas, with high Sharpe and Information ratios. The results are persistent through time and remain when small capitalization firms are eliminated from the investment set. We therefore demonstrate how to combine fundamental analysis and portfolio optimization to jointly exploit the benefits of each.
Keywords: Fundamental Analysis, Portfolio Optimization, Return Prediction, Accounting-Based Valuation
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation