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A Blindfolded Monkey as Portfolio Manager

Åkerberg, Johan LU and Olsson, Mattias (2022) NEKH02 20212
Department of Economics
Abstract
This study aims to investigate whether chance can beat an actively managed equity fund during a ten-year period on the Swedish stock market. Since the stock market consists of fierce competition among investors, the EMH would suggest that stock price movements should not be far from reflecting all available information. Due to the highly unexpected nature of new information, such as news, price fluctuations should follow a random walk. Therefore a highly competent investor, e.g. a fund manager, should not be able to consistently outperform an investor basing his investments on a blindfolded monkey throwing darts at a stock list. The result shows that, on average, randomly generated portfolios of stocks, annually rebalanced during a... (More)
This study aims to investigate whether chance can beat an actively managed equity fund during a ten-year period on the Swedish stock market. Since the stock market consists of fierce competition among investors, the EMH would suggest that stock price movements should not be far from reflecting all available information. Due to the highly unexpected nature of new information, such as news, price fluctuations should follow a random walk. Therefore a highly competent investor, e.g. a fund manager, should not be able to consistently outperform an investor basing his investments on a blindfolded monkey throwing darts at a stock list. The result shows that, on average, randomly generated portfolios of stocks, annually rebalanced during a ten-year period, outperformed the mean fund in return as well as alpha. However, quite expectedly there’s a larger spread of the returns, entailing a larger standard deviation, yet there is a fairly similar Sharpe ratio in comparison to the funds. (Less)
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author
Åkerberg, Johan LU and Olsson, Mattias
supervisor
organization
course
NEKH02 20212
year
type
M2 - Bachelor Degree
subject
keywords
The Efficient Market Hypothesis (EMH), random walk, intelligent investor, annual portfolio adjustment
language
English
id
9071958
date added to LUP
2022-02-03 08:16:33
date last changed
2022-02-03 08:16:33
@misc{9071958,
  abstract     = {{This study aims to investigate whether chance can beat an actively managed equity fund during a ten-year period on the Swedish stock market. Since the stock market consists of fierce competition among investors, the EMH would suggest that stock price movements should not be far from reflecting all available information. Due to the highly unexpected nature of new information, such as news, price fluctuations should follow a random walk. Therefore a highly competent investor, e.g. a fund manager, should not be able to consistently outperform an investor basing his investments on a blindfolded monkey throwing darts at a stock list. The result shows that, on average, randomly generated portfolios of stocks, annually rebalanced during a ten-year period, outperformed the mean fund in return as well as alpha. However, quite expectedly there’s a larger spread of the returns, entailing a larger standard deviation, yet there is a fairly similar Sharpe ratio in comparison to the funds.}},
  author       = {{Åkerberg, Johan and Olsson, Mattias}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{A Blindfolded Monkey as Portfolio Manager}},
  year         = {{2022}},
}