Abstract
Abctract. The paper explores the possibility of forming portfolio of stocks that can generate returns higher than the market over a time period. Various principles are used for portfolio formation in the year 2013, and it is examined whether such portfolios have been able to generate excess returns over the next five years. Data has been used for Indian companies which are listed in the National Stock Exchange and Bombay Stock Exchange. Further, our sample consist of companies that have in operation over this period, have earned profits each year, and have consistently paid dividends in each of the years. The period under consideration has seen upswings and downswings, and it is our interest to explore whether our portfolios have been able to generate excess returns. Our results provide interesting insight into portfolio formation and also structuring of mutual funds.
Keywords. Portfolio, Price/earnings ratio, PEG ratio, Dividend yield, Net profit margin, Excess returns.
JEL. G11, G14, G23, G24.References
Black, F.,& Scholes M (1974). The effects of dividend yield and dividend policy on common stock prices and returns, Journal of Financial Economics, 1(1), 1-22.doi. 10.1016/0304-405X(74)90006-3
Basu, S. (1977). Investment performance of common stocks in relation to their price earnings ratios: A test of the efficient market hypothesis, Journal of Finance, 32, 663-682. doi. 10.1111/j.1540-6261.1977.tb01979.x
Banz, R.W. (1981). The Relationship between Return and Market Value of Common Stocks, Journal of Financial Economics, 9(1), 3-18. doi. 10.1016/0304-405X(81)90018-0
Basu, S. (1983). The relationship between earnings yield, market value and return for NYSE common stocks: Further evidence, Journal of Financial Economics, 12(1), 129-156. doi. 10.1016/0304-405X(83)90031-4
Campbell, J.Y., & Shiller, R.J. (1998). Valuation ratios and the long-run stock market outlook, The Journal of Portfolio Management, 24(2), 11-26. doi. 10.3905/jpm.24.2.11
Chan, L., Hamao, Y., & Lakonishok, J. (1991). Fundamentals and stock returns in Japan, The Journal of Finance, 46(5), 1739-1764. doi. 10.1111/j.1540-6261.1991.tb04642.x
Datta Chaudhuri, T., Ghosh, I., & Eram, S. (2016). Application of unsupervised feature selection, machine learning and evolutionary algorithm in predicting stock returns – A study of Indian firms, The IUP Journal of Financial Risk Management, 13(3), 20-46.
Database CMIE Prowess, (2019). [Retrieved from]., [Retrieved from]., [Retrieved from].
Fama, E.F., & French, K.R. (1995). Size and book-to-market factors in earnings and returns, Journal of Finance, 50(1), 131-155. doi. 10.1111/j.1540-6261.1995.tb05169.x
Fama, E.,& French, K.R. (1988). Dividend yields and expected stock returns, Journal of Financial Economics, 22(1), 3-25. doi. 10.1016/0304-405X(88)90020-7
Graham, B., & Dodd, D. (1934). Security Analysis, Whittlesey House, McGraw hill Book Co.
Jaffe, J., Keim, D.B.,& Westerfield, R. (1989). Earnings yields, market values, and stock returns, Journal of Finance, 44(1), 135-148. doi. 10.1111/j.1540-6261.1989.tb02408.x
Senyigit, Y.B.,& Ag, Y. (2014). Explaining the cross section of stock returns: A comparative study of the United States and Turkey, Procedia - Social and Behavioral Sciences 109, 327-332. doi. 10.1016/j.sbspro.2013.12.466