Advanced

Value Investing and The Magic Formula - a method for successful stock investments

Goumas, Andreas LU and Källström, Peter (2010) NEKK01 20101
Department of Economics
Abstract
With this thesis we want to prove that by using a single formula for picking stocks, Joel Greenblatt’s ‘’Magic Formula’’, it is possible to achieve returns higher than those achieved by a related index. To prove this, we will construct a portfolio, according to “The Magic Formula”, and backtest the portfolio in the Swedish stock market. The test period will be March 1999 to January 2010 and we will compare the results with indexes such as OMX SPI and OMX S30. In order to measure our portfolios performance in relation to the overall market and the risk taken, we will use Fama’s and French’s “Three Factor Model”, Sharpe-ratio and Treynor-ratio as measurements. When we tested the ‘’The Magic Formula’’ portfolio with Fama’s and French’s “Three... (More)
With this thesis we want to prove that by using a single formula for picking stocks, Joel Greenblatt’s ‘’Magic Formula’’, it is possible to achieve returns higher than those achieved by a related index. To prove this, we will construct a portfolio, according to “The Magic Formula”, and backtest the portfolio in the Swedish stock market. The test period will be March 1999 to January 2010 and we will compare the results with indexes such as OMX SPI and OMX S30. In order to measure our portfolios performance in relation to the overall market and the risk taken, we will use Fama’s and French’s “Three Factor Model”, Sharpe-ratio and Treynor-ratio as measurements. When we tested the ‘’The Magic Formula’’ portfolio with Fama’s and French’s “Three Factor Model” during the period 1999 to 2007 we got an annual excess return of 14,1 %. Usually the excess return is explained as a coincidence, which we did not because of the size of the excess return as well as of the length of the period we made the observation. The Sharpe-ratio as well as the Treynor-ratio was 0,309 and 0,186 respectively, which was greater than the market portfolio (OMX SPI) that had a Sharpe-ratio of −0,008 and a Treynor-ratio of −0,004. We also found that by following “The Magic Formula’’ for 36 months the portfolio had a positive return for 83 percent of the 93 periods observed as the OMX SPI and OMX S30 had 50 percent and 46 percent respectively, of the 93 periods observed. (Less)
Please use this url to cite or link to this publication:
author
Goumas, Andreas LU and Källström, Peter
supervisor
organization
course
NEKK01 20101
year
type
M2 - Bachelor Degree
subject
keywords
Stock Market, Magic Formula, Joel Greenblatt, Value Investing
language
Swedish
id
1604111
date added to LUP
2010-05-17 11:42:26
date last changed
2010-05-17 11:42:26
@misc{1604111,
  abstract     = {With this thesis we want to prove that by using a single formula for picking stocks, Joel Greenblatt’s ‘’Magic Formula’’, it is possible to achieve returns higher than those achieved by a related index. To prove this, we will construct a portfolio, according to “The Magic Formula”, and backtest the portfolio in the Swedish stock market. The test period will be March 1999 to January 2010 and we will compare the results with indexes such as OMX SPI and OMX S30. In order to measure our portfolios performance in relation to the overall market and the risk taken, we will use Fama’s and French’s “Three Factor Model”, Sharpe-ratio and Treynor-ratio as measurements. When we tested the ‘’The Magic Formula’’ portfolio with Fama’s and French’s “Three Factor Model” during the period 1999 to 2007 we got an annual excess return of 14,1 %. Usually the excess return is explained as a coincidence, which we did not because of the size of the excess return as well as of the length of the period we made the observation. The Sharpe-ratio as well as the Treynor-ratio was 0,309 and 0,186 respectively, which was greater than the market portfolio (OMX SPI) that had a Sharpe-ratio of −0,008 and a Treynor-ratio of −0,004. We also found that by following “The Magic Formula’’ for 36 months the portfolio had a positive return for 83 percent of the 93 periods observed as the OMX SPI and OMX S30 had 50 percent and 46 percent respectively, of the 93 periods observed.},
  author       = {Goumas, Andreas and Källström, Peter},
  keyword      = {Stock Market,Magic Formula,Joel Greenblatt,Value Investing},
  language     = {swe},
  note         = {Student Paper},
  title        = {Value Investing and The Magic Formula - a method for successful stock investments},
  year         = {2010},
}