In six parts Andrew Stotz will teach you how to Stop Wasting Time and Start Adding Value on the two topics: Stock picking and Managing a portfolio.
The second and third part will focus on value drivers, namely growth and risk. In this third part the focus will be on how changes in risk affects your portfolio return. Inside you'll find evidence that challenges the traditional theory that says 'High risk = High return' and instead shows that you can get Low risk and High return!
2. Pick stocks
Managing
a portfolio
Forecasting
Value drivers
Five factors of return
Risk matters more
Stop targets
Reduce action
Every day is new 13 May 2014 2Source: A. Stotz Investment Research
In six parts Andrew Stotz will teach how to
Stop Wasting Time and Start Adding Value
in stock picking and portfolio management. In
Part II & III the focus will be on value drivers.
Here in Part III we’ll focus on risk.
3. PICKING STOCKS
Value drivers: Growth and risk are the
drivers of value. In Part II we talked
about growth and now in Part III we will
focus on risk as a driver of value
13 May 2014 3Source: A. Stotz Investment Research
9. Started with 16,500 stocks in Asia ex-
Japan from year-end 2003 to 2013
Removed 9,000 stocks that were small, had
low trading volume or were inactive during
any of the years
Then removed the 2,200 China A-shares
stocks, leaving 5,300 available stocks
Our tested universe was 2,700 stocks
that had daily beta in each year
13 May 2014 9
IS UNANTICIPATED RISK
A DRIVER OF VALUE?
Source: A. Stotz Investment Research
10. Methodology
We assume that high beta equals high risk and vice versa
Calculate daily returns beta for each stock in each year
Each year construct quintiles of equal-weighted portfolios
ranked from lowest to highest beta, then calculate that
portfolio’s one-year simple-average return
Rebalance the five portfolios every year until 2012
Calculate the risk-adjusted return, Sharpe ratio per quintile
IS UNANTICIPATED RISK
A DRIVER OF VALUE?
13 May 2014 10Source: A. Stotz Investment Research
11. HIGH RISK = HIGH RETURN?
13 May 2014 11
How do you use beta?
Source: A. Stotz Investment Research
12. HIGH RISK ≠ HIGH RETURN
13 May 2014 12Sources: A. Stotz Investment Research, FactSet
13. LOW RISK = HIGH RETURN
13 May 2014 13Sources: A. Stotz Investment Research, FactSet
14. ASIA: LOW BETA, AVOID
UNANTICIPATED DOWNSIDE RISK
13 May 2014 14Sources: A. Stotz Investment Research, FactSet
15. DATA IS NOT DISTORTED BY LOW BETA
SMALL CAPS
13 May 2014 15Sources: A. Stotz Investment Research, FactSet
16. Low beta means low risk and can also mean
high return
Beta is volatile and mean reverting
Start adding value by focusing on low beta
and reducing unanticipated risk
13 May 2014 16
WHAT WE HAVE LEARNED
Source: A. Stotz Investment Research
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