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Value Drivers: Risk - Stop Wasting Time, Start Adding Value, Part III

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In six parts Andrew Stotz will teach you how to Stop Wasting Time and Start Adding Value on the two topics: Stock picking and Managing a portfolio.

The second and third part will focus on value drivers, namely growth and risk. In this third part the focus will be on how changes in risk affects your portfolio return. Inside you'll find evidence that challenges the traditional theory that says 'High risk = High return' and instead shows that you can get Low risk and High return!

Published in: Economy & Finance, Business
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Value Drivers: Risk - Stop Wasting Time, Start Adding Value, Part III

  1. 1. STOP Wasting Time START Adding Value2014-05-20 For Stocks in Asia High Risk ≠ High Return Part III: Value Drivers - Risk
  2. 2. Pick stocks Managing a portfolio Forecasting Value drivers Five factors of return Risk matters more Stop targets Reduce action Every day is new 13 May 2014 2Source: A. Stotz Investment Research In six parts Andrew Stotz will teach how to Stop Wasting Time and Start Adding Value in stock picking and portfolio management. In Part II & III the focus will be on value drivers. Here in Part III we’ll focus on risk.
  3. 3. PICKING STOCKS Value drivers: Growth and risk are the drivers of value. In Part II we talked about growth and now in Part III we will focus on risk as a driver of value 13 May 2014 3Source: A. Stotz Investment Research
  4. 4. VALUE DRIVERS 13 May 2014 4Source: A. Stotz Investment Research
  5. 5. VALUE DRIVERS Look for unanticipated increases in growth or Unanticipated decreases in risk 13 May 2014 5Source: A. Stotz Investment Research
  6. 6. CAN YOU MAKE MONEY BY LOOKING FOR THE SURPRISE? 13 May 2014 6Source: A. Stotz Investment Research
  7. 7. HIGH RISK = HIGH RETURN? 13 May 2014 7Source: A. Stotz Investment Research
  8. 8. IS UNANTICIPATED RISK A DRIVER OF VALUE? Source: A. Stotz Investment Research
  9. 9. Started with 16,500 stocks in Asia ex- Japan from year-end 2003 to 2013 Removed 9,000 stocks that were small, had low trading volume or were inactive during any of the years Then removed the 2,200 China A-shares stocks, leaving 5,300 available stocks Our tested universe was 2,700 stocks that had daily beta in each year 13 May 2014 9 IS UNANTICIPATED RISK A DRIVER OF VALUE? Source: A. Stotz Investment Research
  10. 10. Methodology We assume that high beta equals high risk and vice versa Calculate daily returns beta for each stock in each year Each year construct quintiles of equal-weighted portfolios ranked from lowest to highest beta, then calculate that portfolio’s one-year simple-average return Rebalance the five portfolios every year until 2012 Calculate the risk-adjusted return, Sharpe ratio per quintile IS UNANTICIPATED RISK A DRIVER OF VALUE? 13 May 2014 10Source: A. Stotz Investment Research
  11. 11. HIGH RISK = HIGH RETURN? 13 May 2014 11 How do you use beta? Source: A. Stotz Investment Research
  12. 12. HIGH RISK ≠ HIGH RETURN 13 May 2014 12Sources: A. Stotz Investment Research, FactSet
  13. 13. LOW RISK = HIGH RETURN 13 May 2014 13Sources: A. Stotz Investment Research, FactSet
  14. 14. ASIA: LOW BETA, AVOID UNANTICIPATED DOWNSIDE RISK 13 May 2014 14Sources: A. Stotz Investment Research, FactSet
  15. 15. DATA IS NOT DISTORTED BY LOW BETA SMALL CAPS 13 May 2014 15Sources: A. Stotz Investment Research, FactSet
  16. 16.  Low beta means low risk and can also mean high return  Beta is volatile and mean reverting  Start adding value by focusing on low beta and reducing unanticipated risk 13 May 2014 16 WHAT WE HAVE LEARNED Source: A. Stotz Investment Research
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