The Efficient Frontier, Momentum Strategy and Seasonal Anomalies Paper Example

Paper Type:  Report
Pages:  5
Wordcount:  1264 Words
Date:  2022-07-03

1 a) The efficient frontier

Efficient frontier tends to show or spread out the set of given optimal portfolios concerning the level of risk that gets given against the maximum expected return. According to this case study, it was assumed that 0.2 percent or 2.4 percent represented the risk- free interests monthly and yearly respectively. On the other hand, the study realized an annual expected return rate of 9 percent which is the same as 0.75 percent in a month. The study mainly involved seven essential companies worldwide using their monthly historical data within five years. With this, the study developed a portfolio of the stocks against the expected returns which enables an individual to compare the risk level as it gets distributed amongst all seven companies.

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Initially one has to determine the distribution of the stock amongst all the seven companies. This means taking a total of 100 percent of the total portfolio and dividing it by the number of companies available which in this case is 7. After determining the weight of the collection, the study identified the returns that were achieved by the companies which translated to 13.8 percent yearly which in other terms is the same as 1.15 percent per month. A standard deviation of 3.58 got realized through optimization. With the percentage for the returns found, the study was able to establish that the expected return was totaling to 1.15 percent for all the seven companies.

The study realized that the one had to surpass a 0.75 percent threshold to make a higher profit in the stock. Finally, the study was able to establish that CBA, RIO, QAN, WES, and AGL were the most preferable to invest in since their profit on the returns were higher compared to that of WPL and WOW.

b) The Markowitz portfolio

Usually, the investors determine how to allocate they asset by investing in a single period. However, there is a lot of variability in the returns when an investor decides to take on multiple periods. The correlation between assets is usually never stable as they change in the universal relations between the existing fundamental assets. The portfolio assumes that an investor can buy securities of any size. This is not practical since securities are not purchased or sold in fractions. Other securities have a minimum order sizes. The model uses the past prices to predict the future returns; there is a lot of bias since there is no guarantee that the market will continuously behave over the years. The Markowitz model provides the portfolio weights infractions against the market trend where investors purchase the shares in whole numbers.

Finally, the portfolio does calculations on expected returns based on historical returns to measure the correlations. The decision made depends on the foreseeable risks and returns derived from the past performance. The portfolio may lack diversification due to the sensitivity of the assets allocated, to changes especially in the inputs of the expected return.

2 a) The momentum strategy

The strategy aims at keeping or else continuing the outcomes of a given market in the same way for extended periods. In this case study, a group of 30 companies in the US got used under the 6/6 approach. The beta of in this case study was maintained at 0.90 whereas the alpha was at 0.95 which is an indication that the change between the gainers and losers was quite insignificant throughout the stock market.

b) Momentum strategy theories

Yes, the evidence is consistent with the empirical evidence on the momentum premium. The investment strategy is effective in asset allocation as it reduces the risk of investing too heavily in a single asset. The industry momentum direction helps in the active tracking of the premiums ensuring that long-term goals get met. The beta gets considered as the risk premium. The smaller bonus has a less value premium. The trading stocks are higher in the smaller stocks as compared to the large stocks. These trading stocks have a high turnover. The total stock market fund has the small-cap and value stocks. This is so because of its exposure to beta. The collection consisting of three assets that had experienced six consecutive gains realized similar volumes of returns to those that registered six successive losses. Hence, the study proved that both the magnitude and direction of the momentum premium did not affect the future profits of stock.

3 a) Seasonal anomalies

The assets and capital of the company can comfortably be used to settle the debts. The information from ratios shows that the company is on the right track in as far as its performance in the industry is concerned. Many of the industry retailers possess but little solvency given that the available inventory aid in increasing their cash flows. To run the sales event smoothly and avoid chaos happen during the festival, US (TOTMKUS) and Australian (TOTMKAU), the enterprise will increase the inventory from the supplier and employ well-experienced sales assistance from the headquarters. The study also analyzed on the day of the week effect on the stock prices to establish the bad or good days of the two markets. Similarly, the study had to analyze the day of the week effect on the stock prices to determine the bad or good days of the two markets. On the other hand, the study had to test the monthly impact of both markets using the monthly data provided. In the end, it got found out that the market failed weekly, but there was no significant effect that any of the monthly results caused.

b) Effects of seasonal anomalies

Yes, it is possible for an investor to benefit from the earnings reports. The investor can go against the efficient market hypothesis and invest immediately a company reports its earning. This is because the market takes time before absorbing the shared information. The anomaly usually experienced in January can be an advantage to the investors since the effect goes against the efficient market hypothesis. The investors can buy the stocks in December when the shares get sold at a loss. They then can sell those stocks in January, therefore, making a profit. The size effect shows that smaller companies have a higher return as compared to large firms based on a risk adjustment. Firms that get neglected due to their smaller sizes tend to have a higher level of profits, thereby negating the efficient market hypothesis. The investors can invest in such firms. Lastly, the study further showed that the investors rely on the annual anomalies and such practice has made the market to behave strangely.


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The Efficient Frontier, Momentum Strategy and Seasonal Anomalies Paper Example. (2022, Jul 03). Retrieved from

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