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!

1. STOP
Wasting Time
START
Adding Value2014-05-20
For Stocks in Asia
High Risk ≠ High Return
Part III: Value Drivers - Risk

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. 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. VALUE DRIVERS
13 May 2014 4Source: A. Stotz Investment Research

5. VALUE DRIVERS
Look for unanticipated
increases in growth
or
Unanticipated
decreases in risk
13 May 2014 5Source: A. Stotz Investment Research

6. CAN YOU
MAKE MONEY
BY LOOKING FOR
THE SURPRISE? 13 May 2014 6Source: A. Stotz Investment Research

7. HIGH RISK = HIGH RETURN?
13 May 2014 7Source: A. Stotz Investment Research

8. IS UNANTICIPATED RISK
A DRIVER OF VALUE?
Source: A. Stotz Investment Research

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. 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. HIGH RISK = HIGH RETURN?
13 May 2014 11
How do you use beta?
Source: A. Stotz Investment Research

12. HIGH RISK ≠ HIGH RETURN
13 May 2014 12Sources: A. Stotz Investment Research, FactSet

13. LOW RISK = HIGH RETURN
13 May 2014 13Sources: A. Stotz Investment Research, FactSet

14. ASIA: LOW BETA, AVOID
UNANTICIPATED DOWNSIDE RISK
13 May 2014 14Sources: A. Stotz Investment Research, FactSet

15. DATA IS NOT DISTORTED BY LOW BETA
SMALL CAPS
13 May 2014 15Sources: A. Stotz Investment Research, FactSet

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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