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

Lyle, Matthew R. and Yohn, Teri Lombardi, Optimal Fundamental Investing (July 12, 2019). Kelley School of Business Research Paper No. 19-8. Available at SSRN: https://ssrn.com/abstract=3300976 or http://dx.doi.org/10.2139/ssrn.3300976

Matthew R. Lyle (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Teri Lombardi Yohn

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
(812) 855-0430 (Phone)

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