Value Investing and The Magic Formula  a method for successful stock investments
(2010) NEKK01 20101Department 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”, Sharperatio and Treynorratio 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”, Sharperatio and Treynorratio 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 Sharperatio as well as the Treynorratio was 0,309 and 0,186 respectively, which was greater than the market portfolio (OMX SPI) that had a Sharperatio of −0,008 and a Treynorratio 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:
http://lup.lub.lu.se/studentpapers/record/1604111
 author
 Goumas, Andreas ^{LU} and Källström, Peter
 supervisor

 Hossein Asgharian ^{LU}
 organization
 course
 NEKK01 20101
 year
 2010
 type
 M2  Bachelor Degree
 subject
 keywords
 Stock Market, Magic Formula, Joel Greenblatt, Value Investing
 language
 Swedish
 id
 1604111
 date added to LUP
 20100517 11:42:26
 date last changed
 20100517 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”, Sharperatio and Treynorratio 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 Sharperatio as well as the Treynorratio was 0,309 and 0,186 respectively, which was greater than the market portfolio (OMX SPI) that had a Sharperatio of −0,008 and a Treynorratio 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}, }