What will happen to your investment if you ignore change of share prices while calculating both returns and risk during stocks portfolio selection? Is it profitable in long term to
sell a share when its price has started to skyrocket?
The article re-institutes the investor faith in CAPM model and talks about how CAPM is very closely coupled to the actual investment practices at the ground level. The general criticism of CAPM model that it does not fit empirical asset pricing well cast doubt on the validity of model have been explained.
An Empirical Investigation of Fama-French-Carhart Multifactor Model: UK Evidenceiosrjce
The study employs Fama-French-Carhart Multifactor Model to investigate the significance of Firm
Size, Book-to-Market ratio and Momentum in explaining variations in returns of stocks listed on the UK equity
market using monthly stock data of 100 randomly selected UK stocks from January 1996 to December 2013
collected from DataStream 5.0. The empirical results from the Ordinary Least Square (OLS) regression analysis
of the test of the multifactor model found firm size insignificant for three of the six portfolios formed; the value
factor (book-to-market ratio) significant for all the six portfolios while the momentum factor is significant for
the three portfolios with big market capitalization stocks. Overall, the empirical results indicate the presence of
value effect among small-cap and big-cap stocks and momentum effect among big-cap stocks in the London
Stock Exchange. Firm size is not found to be a reliable significant factor in explaining stock returns in the
equity market.
The article re-institutes the investor faith in CAPM model and talks about how CAPM is very closely coupled to the actual investment practices at the ground level. The general criticism of CAPM model that it does not fit empirical asset pricing well cast doubt on the validity of model have been explained.
An Empirical Investigation of Fama-French-Carhart Multifactor Model: UK Evidenceiosrjce
The study employs Fama-French-Carhart Multifactor Model to investigate the significance of Firm
Size, Book-to-Market ratio and Momentum in explaining variations in returns of stocks listed on the UK equity
market using monthly stock data of 100 randomly selected UK stocks from January 1996 to December 2013
collected from DataStream 5.0. The empirical results from the Ordinary Least Square (OLS) regression analysis
of the test of the multifactor model found firm size insignificant for three of the six portfolios formed; the value
factor (book-to-market ratio) significant for all the six portfolios while the momentum factor is significant for
the three portfolios with big market capitalization stocks. Overall, the empirical results indicate the presence of
value effect among small-cap and big-cap stocks and momentum effect among big-cap stocks in the London
Stock Exchange. Firm size is not found to be a reliable significant factor in explaining stock returns in the
equity market.
These Lecture series are relating the use R language software, its interface and functions required to evaluate financial risk models. Furthermore, R software applications relating financial market data, measuring risk, modern portfolio theory, risk modeling relating returns generalized hyperbolic and lambda distributions, Value at Risk (VaR) modelling, extreme value methods and models, the class of ARCH models, GARCH risk models and portfolio optimization approaches.
These Lecture series are relating the use R language software, its interface and functions required to evaluate financial risk models. Furthermore, R software applications relating financial market data, measuring risk, modern portfolio theory, risk modeling relating returns generalized hyperbolic and lambda distributions, Value at Risk (VaR) modelling, extreme value methods and models, the class of ARCH models, GARCH risk models and portfolio optimization approaches.
Arbitrage pricing theory & Efficient market hypothesisHari Ram
Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic variables that capture systematic risk.
These Lecture series are relating the use R language software, its interface and functions required to evaluate financial risk models. Furthermore, R software applications relating financial market data, measuring risk, modern portfolio theory, risk modeling relating returns generalized hyperbolic and lambda distributions, Value at Risk (VaR) modelling, extreme value methods and models, the class of ARCH models, GARCH risk models and portfolio optimization approaches.
These Lecture series are relating the use R language software, its interface and functions required to evaluate financial risk models. Furthermore, R software applications relating financial market data, measuring risk, modern portfolio theory, risk modeling relating returns generalized hyperbolic and lambda distributions, Value at Risk (VaR) modelling, extreme value methods and models, the class of ARCH models, GARCH risk models and portfolio optimization approaches.
Arbitrage pricing theory & Efficient market hypothesisHari Ram
Arbitrage pricing theory (APT) is a multi-factor asset pricing model based on the idea that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic variables that capture systematic risk.
Testing and extending the capital asset pricing modelGabriel Koh
This paper attempts to prove whether the conventional Capital Asset Pricing Model (CAPM) holds with respect to a set of asset returns. Starting with the Fama-Macbeth cross-sectional regression, we prove through the significance of pricing errors that the CAPM does not hold. Hence, we expand the original CAPM by including risk factors and factor-mimicking portfolios built on firm-specific characteristics and test for their significance in the model. Ultimately, by adding significant factors, we find that the model helps to better explain asset returns, but does still not entirely capture pricing errors.
Dissertation template bcu_format_belinda -sampleAssignment Help
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MODELING THE AUTOREGRESSIVE CAPITAL ASSET PRICING MODEL FOR TOP 10 SELECTED...IAEME Publication
Systematic risk is the uncertainty inherent to the entire market or entire market segment and Unsystematic risk is the type of uncertainty that comes with the company or industry we invest. It can be reduced through diversification. The study generalized for selecting of non -linear capital asset pricing model for top securities in BSE and made an attempt to identify the marketable and non-marketable risk of investors of top companies. The analysis was conducted at different stages. They are Vector auto regression of systematic and unsystematic risk.
Since the CAPM model Sharpe (1965) and the first “fundamental” model by King (1966) the use of “factors” in alpha generation and risk modeling has become mainstream. However, the types of factors we employ and the techniques we use to model relationships have in general not progressed much since. In addition, many of our favorite techniques assume that the world is static, whereas of course markets evolve and change dramatically; as we have seen so vividly illustrated over the last few years.
We review fundamental, macro-economic, and statistical factors, describing the advantages and disadvantages of each, and review some newer techniques that explicitly allow for evolving relationships in data sets and harness emerging technologies that can capture much more nuanced relationships than simple correlation: “flexible” least-squares regression, artificial immune systems, single-pass clustering, semantic clustering, social network influence measurement, layer-embedded networks, block-modeling, and more.
Prepared by Students of University of Rajshahi
Shahin Islam
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Amy Khatun
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presented by Mango squad
For downloading this contact- bikashkumar.bk100@gmail.com
Motivated by the problem of computing investment portfolio weightings we investigate various methods of clustering as alternatives to traditional mean-variance approaches. Such methods can have significant benefits from a practical point of view since they remove the need to invert a sample covariance matrix, which can suffer from estimation error and will almost certainly be non-stationary. The general idea is to find groups of assets which share similar return
characteristics over time and treat each group as a single composite asset. We then apply inverse volatility weightings to these new composite assets. In the course of our investigation we devise a method of clustering based on triangular potentials and we present associated theoretical results as well as various examples based on synthetic data.
The reason why should undergo into the arbitrage trading is very simple and its because its risk free investment option. Though it contains certain risk if one fails to follow the protocol define for Arbitrage Trading. Usually Arbitrage is risk free until and unless there is no financial crises.
Similar to Dividend portfolio – multi-period performance of portfolio selection based solely on dividend yields (20)
Dispatching taxi cabs with ridesharing – an efficient implementation of popul...Bogusz Jelinski
The article describes how to effectively dispatch hundreds of thousands
ride requests per hour, with thousands of cabs. Not only which cab should pick up
which passenger, but which passengers should share a ride and what is the best pickup
and drop-off order. An automatic dispatching process has been implemented to
verify feasibility of such cab sharing solution, simulation was used to check quality
of routes. Performance of different programming tools and frameworks has been
tested. Thousands of passengers per minute could be dispatched with basic
algorithms and simple hardware and they can be dispatched in a cab sharing scheme
very effectively, at least 11 passengers per cab per hour. The spotlight is on practical
aspects, not well-known theory. The goal is to verify feasibility of a large-scale
dispatcher and to give its benchmark. Implementation of algorithms including a
dispatcher and simulation environment is available as open source on GitHub.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
how can I sell pi coins after successfully completing KYC
Dividend portfolio – multi-period performance of portfolio selection based solely on dividend yields
1. Dividend portfolio – multi-period performance of portfolio selection based
solely on dividend yields
(DRAFT)
Bogusz Jelinski
September 29th, 2020
Abstract: What will happen to your investment if you ignore change of share prices while
calculating both returns and risk during stocks portfolio selection? Is it profitable in long term to
sell a share when its price has started to skyrocket? Backtesting of a decade-long investment with
periodic portfolio rebalancing shows a continuous advantage of such radical and non-intuitive
approach over the classic formula of return-on-investment. The idea to concentrate on dividend
yield in portfolio selection theory, contrarian to popular models, is at least thirty years old, here it is
tested and some practical aspects are analyzed. With the help of a computer simulation it is possible
to show the impact of both different frequencies of portfolio rebalance, which was huge, and
different risk levels. All simulations have been logged to files so that it is possible to trace changes
in portfolios including dividends paid and splits without running the simulator, which is published
on GitHub as open-source with an instruction manual and can easily be run by anyone.
Keywords: dividend contrarian dynamic portfolio selection computer simulation backtesting
Key Takeaways:
- historical prices of stocks, their past performance might not be the best hint on how to invest
- a naive method to pick out the best stocks for a portfolio (opposed to nonlinear programming) can
provide very good results
- the naive method gives better results in low risk strategies, risk-return tradeoff has not been
observed,
- there is no evidence that portfolio selection based on dividend yield performs worse in bearish or
bullish periods. Yields were quite consistent throughout decades.
Introduction
Harry Markowitz’ work (1959) contributed vastly to the development of financial economics and
established underpinnings for Modern Portfolio Theory – a framework for the construction of
investment portfolios. There were many followers, new models and theories, both normative ones
describing how investors should behave and positive ones like CAPM, which proposes hypothesizes
how markets actually behave. MPT1 includes numerous implicit and explicit assumptions about
markets and investors, and criticisms emerged soon after the theory got its audience. For example
asset returns have shown to be far from the normal distribution, with fat tails and high kurtosis.
Even Markowitz pointed out limitations of his own work by warning us that when past
performances of securities are used as inputs, the outputs of the analysis are portfolios which
performed particularly well in the past.
One of criticisms refers to risk-return tradeoff. Haugen and Heins (1975) found that risk
might not generate a special reward. Murphy (1977) cited several studies, which concluded that
there might not be any stable relationship between return and risk. Fama and French stated after
having examined 9500 stocks across three decades that risk measured by beta was not able to
predict performance. It has to be noted that despite scientific evidence, much wider than mentioned
1 This acronym will be used later on to refer to the initial Markowitz’s model. Modern Portfolio Theory contains a
much wider spectrum of models and ideas.
1
2. above, one can still find books on investment which state without deeper reflection or any
reservation that «there is a risk-return trade-off» (like Bradford, 2009, p. 208). Fama and French
also found that shares with lower P/E ratios and price to book ratios provided the highest returns,
stocks are more bound to these measurements than to beta. Similar observations were made among
others by Basu (1977), Rosenberg (1985), Bhandari (1988), but you could find such claims already
in Graham and Dodd (1934). The alleged risk-return tradeoff can however be observed in some
results of simulations presented below.
A fundamental and still debated question is how risk ought to be measured. The original
variance approach began to be troublesome as markets were becoming more volatile. It has forced
scientists and financial institutions to invent other risk measures, like for example JP Morgan’s
Value-at-Risk or copula proposed by Sklar (1973). Although variance will be used here, techniques
used for simulations allow for further research on the impact of different risk definitions on
portfolio performance.
While estimating risks and returns using the historical performance of stocks it has to be
decided which time frame should be used to get the sample. It was seen as MPT’s drawback by
Fabozzi (2002) and the results of simulations presented here show a vast impact of this decision.
Estimation error attracted attention of many researchers, a good overview was given by DeMiguel
(2009). DeMiguel’s work is worth mentioning not only because it is similar to what is proposed in
this article – the 1/N, naive strategy is used as a benchmark for other approaches. It shows that the
estimation window needed for the sample-based mean-variance strategy and its extensions to
outperform the 1/N benchmark is around 3000 months for a portfolio with 25 assets and about
6000 months for a portfolio with 50 assets. Estimation errors were claimed to be the cause of poor
performance of sample-based portfolios. The results shown below contradict such claims in long
term – MPT portfolios performed much better than S&P index. Another contradiction found is that
there have been claims that MPT portfolios tend to have large quantities of individual assets,
Affleck-Graves (1996) found that weights are limited to about 40 percent. In results presented
below many risky portfolios produced by model solver did contain just one asset during
backtesting.
Concentration on dividends as the main source of wealth and on other «value» strategies
based on different intrinsic properties was one of the mainstream ideas at least since Fama and
French published their studies on the power of dividends yield to explain stock returns. Their
findings suggested that it increases with return horizon. Two decades later Bekaert (2006) wrote that
the ability of the dividend yield to predict excess returns is best visible at short horizons. Another
contribution was provided by Lakonishok (1994) who postulated that over longer horizons, value
strategies have outperformed glamour2 strategies quite consistently. He also considered possible
explanations for this extraordinary performance – value strategies were contrarian3 to naive
strategies based on past earnings, investors get overly excited by past and are irrespectful to mean
reversion (Kahneman, 1982, p. 417). Lakonishok’s evidence does not support the hypothesis that
value strategies are fundamentally riskier. Let us mention a few more researchers interested in value
portfolios. A study done by Keppler (1991), which examined the link between price-to-cash flow
and investment returns found that the most profitable strategy was investment in the lowest price-to-
cash flow quartile. Arnott (2003) examined different components of equity returns in 200 years. His
conclusion was that dividends were responsible for most of returns «dwarfing» rise of prices.
Interestingly some studies independently found that the ninth decile outperforms the highest
yielding one.
2 fast growing
3 Because this term is used not only for portfolios controlled by dividend yields «dividend portfolio» will be used
instead
2
3. MPT is a single-period, static theory on the choice of portfolio, although Markowitz also
tried to extend his optimization criterion with the expected utility of wealth after many reinvestment
periods and used SIMSCRIPT for simulations (Rubinstein, 2002). This approach of a repeated game
between the nature and the investor, sometimes called «dynamic hedging» or backtesting, is used
during simulations here4.
Two models will be compared – the classic MPT and a model based solely on dividend yields,
ignoring changes in asset valuations and even ignoring optimization – weights will be split evenly.
Portfolios will be continuously adjusted (rebalanced) by buying and selling shares in response to
variations of prices and dividends. The terminal wealth will be compared.
To sum up what needs to be addressed:
- does ignoring changes in stock valuations bring extra benefit over MPT?
- is this benefit consistent trough-out decades?
- does taking risk reward an investor, is there any risk-profit tradeoff?
- what is the impact of different sampling methods, different period lengths?
- what is the structure of MPT portfolios, does a weight exceed 50 percent and when?
- what values of strategy attributes (preferred risk, rebalance frequency) give best results?
- does the number of assets in dividend portfolio make a difference?
Classic mean-variance model
In order to help recognize the model used for simulations in the source code and help understand
the flow of the simulation let us sum up some widely known formulas for sample-based
Markowitz’s model. In order to invest in stocks one would choose a period of time in recent history,
divide this period into smaller parts and calculate returns on investment of a chosen set of stocks:
ROI = Final Price−Init i al Price+Divi dend sPa yout s−T ransact ionC ost s
I nit i al Price
Then an optimal portfolio would be found, which would require making some assumptions – is it
the expected return that should be maximized with an assumed, maximum level of accepted risk or
the risk that should be minimized with an assumed, minimum level of return? Having estimated the
mean values and the covariance matrix we can construct the classic model proposed by Markowitz:
E=∑
i=1
N
xi ^
μi
V=∑
i=1
N
∑
j=1
N
^
σi j xi xj
∑
i=1
N
xi=1
xi≥0 f o r i=1.. N
Depending on investors preferences (emin or vmax) you can have two variants of the model to solve:
V →M I N
E≥emi n
4 The simulator with a short manual is available on GitHub: https://github.com/boguszjelinski/stocks
3
4. or
E→M A X
V ≤vma x
The latter will be used in simulations. No short sale, dividends will be reinvested. As transaction
costs are negligible in a large scale, they will not be calculated.
Dividend portfolio
The dividend portfolio will be constructed differently. The ROI will ignore the change of valuation:
ROI = Di vidends Pa youts−T ransact ionC ost s
I nit ial Pri ce
The variance will be estimated for each stock, stocks exceeding vmax will be ignored, the rest will be
sorted by mean dividend yield. The best scoring ’n’ stocks will be picked up and evenly split in the
portfolio.
Simulation results
Let us assume we have 100000 USD, investment horizon is 16 years starting Jan 1st 2000. This
spans over two periods of both decline and growth, and gives a good insight in performance in
different market conditions – see Figure 2. We would like to invest in S&P 100 stocks. We can
rebalance portfolio every month or once a year, or somewhere in between. It means we have 12*16
rebalances when one month has been chosen, or 16 rebalances with period length of one year. We
can have different risk preferences. While gathering the sample (for assessing risk and return) let us
look into twelve preceding periods of the same length as the chosen rebalance period – a rolling
window sample. It sounds quite natural – someone interested in long-term investments would not
perceive a short-term fluctuations as valuable information. Sampling approaches are not in scope of
this work although impact of different sampling periods have been analyzed – see tables 2 and 3.
We ignore the possibility of estimation error.
With MPT we maximize expected return, we use a SCS solver to find the optimal portfolio5. Figure
1 shows the achieved terminal wealth depending on how often portfolios are rebuilt (in months) and
how high the acceptable risk is.
Figure 1. Terminal wealth of 42 strategies achieved with MPT and dividend portfolio.
5 https://github.com/cvxgrp/scs/
4
5. Dividend portfolios contained four best scoring assets. Simulations with two and ten assets showed
that four is a better choice, but differences were small.
It is clearly visible that these two portfolios react differently to risk. In MPT one could see the risk-
return tradeoff while in “dividend portfolio” the lowest risk prevails. The average wealth of 42
strategies is significantly higher in “dividend portfolio” (372884 vs 455621). Both MPT and
dividend portfolios outperformed S&P100 in 16 year period – see Figure 2. A more detailed
analysis of investment «trajectories» shows that the dividend portfolios coped with the 2000-2002
decline, but were not resistant to that in 2008 and 2009. Similar conclusion could be drawn for the
1990-2000 decade (not shown in the chart).
Figure. 2 MPT and dividend portfolios vs S&P100 – terminal wealth in thousands USD
(from Jan 1st 2000 till Jan 1st 2016, rebalance after 3 months)
Table 1 shows how the maximum risk in the MPT model affects portfolio structure – it has not been
observed that portfolios contain large quantities of individual assets, portfolios with just one asset
were often proposed by the solver for more risky portfolios (vide Affleck-Graves).
Table 2 and Table 3 show how differences in sampling (different lengths of period's
window) affects one chosen strategy (0.005/12) in MPT and dividend portfolios respectively. As
you can see the impact on the terminal wealth may be vast, but table is not meant to provide any
hint for investors due to probably significant estimation errors.
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6. [%] Number of different tickers in portfolios
V≤ 1 2 3 4 5 6 7 8 9
0.005 3.3 10.0 22.5 35.0 18.3 5.8 1.7 2.5 0.8
0.015 17.5 30.8 30.8 12.5 5.0 0.0 2.5 0.8 0.0
0.075 75.8 14.2 6.7 2.5 0.8 0.0 0.0 0.0 0.0
0.375 92.5 2.5 2.5 1.7 0.8 0.0 0.0 0.0 0.0
Table 1. Structure of MPT portfolios depending on maximum risk – frequencies of particular sizes
in 120 rebalances, as a percentage (start on Jan 1st 2000, rebalance after 1 month)
Number of periods in sample
6 12 18 24
Length
of
period
in
months
3 358 330 364 463
6 453 207 258 315
9 267 241 429 324
12 340 270 303 286
Table 2. Impact of different sampling methods on terminal wealth in MPT
(in thousands; start on Jan 1st 2000, V≤0.005, rebalance after 12 months, 16 rebalances)
Number of periods in sample
6 12 18 24
Length
of
period
in
months
3 258 468 428 243
6 420 251 317 657
9 339 459 639 725
12 358 649 766 438
Table 3. Impact of different sampling methods on terminal wealth, «dividend portfolio»
(in thousands; start on Jan 1st 2000, V≤0.005, rebalance after 12 months, 16 rebalances)
Figure 3 is an example of documentation generated by the simulator in order to examine its flow
and correctness of historical data6. It shows a dividend portfolio purchased Jul 1st 2010 and its value
three months later. A 1000000 / 937989 split was considered on VZ (Jul 2nd 2010).
6 Data downloaded from Yahoo had some missing or wrong data in dividends and splits. Output generated by Python
simulator differs.
6
7. Figure 3. Example of the simulator log
An obvious question would be if the dividend advantage is consistent throughout decades.
Figures 4 and 5 show the realized yearly dividends from the «dividend portfolio» between Jan 1st
1980 and the end of 2015, for V≤0.005 and V≤0.375 scenarios respectively (arithmetic mean of
four assets). Values tend to fluctuate around 5%, with some extraordinary positive deviations
(mean=0.05, variance=0.0002 and mean=0.06 and variance=0.001 respectively). It looks like a
trustworthy foundation for the dividend portfolio.
Figure 4. Dividend yields for V≤0.005 realized in 36 years - «dividend portfolio» strategy
(yearly values, start on Jan 1st 1980, rebalance after 3 months)
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8. Figure 5. Dividend yields for V≤0.375 realized in 36 years - «dividend portfolio» strategy
(yearly values, start on Jan 1st 1980, rebalance after 3 months)
Computational considerations and reproducibility
There are essential differences in datasets distributed freely in the Internet and these differences
have had vital impact on terminal wealth. As an example – while comparing Yahoo and Tiingo
datasets one third of paid dividends are different by more than 10 cents, 15% of splits are different
by more than 0.1 (10%), there are differences in stock prices too. Differences are smaller when
comparing Tiingo to Quandl, but still not negligible. The same effect was observed while running
simulations in different languages (Python vs Java) – small differences in implementations have
affected the terminal wealth quite significantly. All simulations are available in GitHub and these
differences can be reviewed.
Conclusions
The dividend portfolio even in a primitive form (no solver) outperforms the classic portfolio theory
quite consistently in low risk scenarios and it is generally a viable alternative to MPT. There is no
evidence that the dividend portfolio performs worse in bearish or bullish periods. The contrary –
achieved dividend yields were steady throughout decades and taking less risk did not punish the
investor. The risk-return tradeoff is visible in results for MPT but the structure of risky MPT
portfolios tends to contain few assets making such strategies unacceptable to most investors.
There are several topics that might need further research or improvements – reducing
estimation errors, other risk measures and techniques like dividend arbitrage. Does semi-variance
give better results? Does the ninth decile perform better than the last one? Why was there a
difference in performance in two decline periods which were under scrutiny? Maybe the optimal
parameters of strategies differ in bearish and bullish periods. This was not evident either which
investment horizon (short or long) gives higher results. The simulator, which is available on GitHub
as open-source, may also be used to continue research on MPT – a few contradictions to other
research were found. Most importantly - sharing the source code on GitHub allows for cooperative
research and easy reproducibility and verification of results.
8
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