Low-risk investment strategy: sector bets or stock bets?

PurposeThe portfolio of low-risk stocks outperforms the portfolio of high-risk stocks and market portfolios on a risk-adjusted basis. This phenomenon is called the low-risk effect. There are several economic and behavioral explanations for the existence and persistence of such an effect. However, it is still unclear whether specific sector orientation drives the low-risk effect. The study seeks to answer the following important questions in Indian equity markets: (a) Whether sector bets or stock bets mainly drive the low-risk effect? (b) Is it a mere proxy for the well-known value effect? (c) Does the low-risk effect prevail in long-only portfolios?Design/methodology/approachThe study is based on all the listed stocks on the National Stock Exchange (NSE) of India from December 1994 to September 2018. It classifies them into 11 Global Industry Classification Standard (GICS) sectors to construct stock-level and sector-level BAB (Betting Against Beta) and long-only low-risk portfolios. It follows the study of Asness et al. (2014) to construct various BAB portfolios. It applies Fama–French (FF) three-factor and Fama–French–Carhart (FFC) four-factor asset pricing models in addition to Capital Asset Pricing Model (CAPM) to examine the strength of BAB, sector-level BAB, stock-level BAB and long-only low-beta portfolios.FindingsBoth sector- and stock-level bets contribute to the return of the low-risk investing strategy, but the stock-level effect is dominant. Only betting on safe sectors or industries will not earn economically significant alpha. The low-risk effect is unique and not a value effect in disguise. Both long-short and long-only portfolios within sectors and industry groups deliver positive excess returns. Consumer staples, financial, materials and healthcare sectors mainly contribute to the returns of the low-risk effect in India. This study offers empirical evidence against the Samuelson (1998) micro-efficient market given the strong performance of the stock-level low-risk effect.Practical implicationsThe superior performance of the low-risk investment strategies at both stock and sector levels offers investors an opportunity to strategically invest in stocks from the right sectors and earn high risk-adjusted returns with lower drawdowns over an entire market cycle. Besides, it paves the way for stock exchanges and index manufacturers to launch sector-specific low-volatility indices for relevant sectors. Passive funds can launch index funds and exchange-traded funds by tracking these indices. Active fund managers can espouse sector-specific low-risk investment strategies based on the results of this and similar other studies.Originality/valueThe study is the first of its kind. It offers insights into the portfolio characteristics and performance of the long-short and the long-only variant of low-risk portfolios within sectors and industry groups. It decomposes the low-risk effect into sector-level and stock-level effects.

Investment Risk Tolerance amongst South African University Students in the Vaal Triangle Area

Analysing students risk tolerance during the investor life cycle is imperative to students and financial planners alike, to facilitate the implementation of suitable investments and investment strategies. Students in universities do not have the required knowledge to invest and this is why an investment framework was created to assist, guide and inform students of what stage of the individual investor life cycle that they are in and suggest suitable investment strategies. The article implemented a quantitative approach, using secondary data analysis. The data used for the analysis is from a self-administered questionnaire in 2017 that was distributed to a sample of 396 students from two higher education institutions in the Vaal Triangle region. Two validated risk tolerance scales were used to analyse students risk tolerance levels. The objective of this paper was to determine the risk tolerance levels of students in the Vaal Triangle region. The two results from the 13-item scale and the single-item scale for measuring risk tolerance indicated that the students have a medium risk tolerance level.

Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. In accounting for the asset-liability mismatch risk of the institution, we present a general utility optimization problem in a discrete-time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate, and credit intensity fluctuations, and show by numerical results that the optimal strategy improves both the solvency and asset returns of the institution compared to a standard institutional investor’s asset allocation.

Archetypal Analysis and DEA Model, Their Application on Financial Data and Visualization with PHATE

One of the goals of macroeconomic analysis is to rank and segment enterprises described by many financial indicators. The segmentation can be used for investment strategies or risk evaluation. The aim of this research was to distinguish groups of similar objects and visualize the results in a low dimensional space. In order to obtain clusters of similar objects, the authors applied a DEA BCC model and archetypal analysis for a set of companies described by financial indicators and listed on the Warsaw Stock Exchange. The authors showed that both methods give consistent results. To get a better insight into the data structure as well as a visualization of the similarities between objects, the authors used a new approach called the PHATE algorithm. It allowed the results of DEA and archetypal analysis to be visualized in a low dimensional space.

Pricing strategy and product quality design with platform-investment

<p style='text-indent:20px;'>With the development of business, more consumers are quality sensitive and improving the product quality becomes particularly important. We mainly discuss two investment strategies: retailer-investment and platform-investment. Compared with non-investment case, only if consumer sensitivity is not too high, it is profitable for the retailer to select retailer-investment. When both retailer-investment and platform-investment are viable, the choice of investment mechanism depends on the profit-sharing ratio. Particularly, if the ratio is within a certain range, the optimal investment strategy is platform-investment, achieving a triple-win outcome. Besides, to effectively alleviate the contradiction between the retailer's moral hazard problem and the sustainable value-added effect of platform-investment, we further research the contract term. These results give us some meaningful management inspirations in investment mechanism.</p>

Does Technical Analysis Win?

The main goal of this chapter is to analyze the performance of four investment strategies within a recent period of international political uncertainties. RSI and MACD supported three competing investment strategies, which were compared to the conservative Buy and Hold strategy. Euro Stoxx 50 Index was selected through the Markowitz Theory, and the DAX index was established as a benchmark. The period considered was between the start of Donald Trump's official campaign to the US elections and the first date set for Brexit. Two subsequent additional studies were performed to evaluate their profitability. The entry and exit points were determined by international economic reports. Alternative time lengths for the RSI window were considered. The results suggest that, when the market is bear or undefined, the investor should have a strategy supported on technical analysis and he should consider more than one indicator to increase the information that is taken from the market. The passive Buy and Hold strategy should be considered when the market is considered a bull market.

Volatility in Indian Stock Markets During COVID-19

The aim of the paper is to evaluate the impact of novel COVID-19 on the returns and volatility of Indian stock markets with special reference to equity investment strategies of Bombay Stock Exchange. For the purpose of evaluating the impact, the study has applied GARCH) The research has considered a time frame from March, 2015 to January, 2021. Prior to implementing GARCH model, pre-estimation tests i.e., Augmented Dickey-Fuller and ARCH-Lagrange Multiplier, were conducted. Outcomes clearly indicate that the returns during the crisis for all the strategy indices have been negative which means that the COVID-19 outbreak resulted in massive losses. Additionally, 'during crisis' period showed increase in volatility for all the strategy indices depicting that the pandemic has a long-lasting effect and will take time to fade off. This research will help the investors in the investment decision process by giving them insights about the different strategies.

Comparing the Performance and Management Style of Retirement Pension Funds before and after the Private Pension Activation Plan

We analyzed and compared the performance and management style of retirement pension funds before and after the private pension activation plan (PPAP). First, we found that retirement-pension funds showed better performance than public funds before the PPAP. However, after the PPAP, the retirement-pension market size increased and the difference in performance disappeared. Second, we found that the difference between top and bottom performance group in the retirement pension fund becomes more significant after the PPAP. Third, we found that various investment strategies such as small-medium size stock investment and sector investment are offered in the retirement-pension fund only to result in the inferior performance. Finally, when we compared the management style, the retirement-pension funds showed a smaller value factor compared to public funds for the period after the PPAP. Therefore, we argue that the fund selection has become a more significant factor in determining the retirement fund performance after the PPAP. However, considering that the average retirement-pension holders’ financial knowledge is rather low, the expansion of fund choices may adversely affect the pension holder’s performance. Therefore, a retirement-pension provider’s role as fund selection authority has become more critical, and it is necessary to establish an institutional device that can manage, supervise, and monitor their activities.

ESG factors as tool for forming business reputation

The article focuses on the ESG factors determining the activities of most companies in recent years. The relationship between ESG principles and the business reputation of a modern company has been indicated. Business reputation is found to be formed under the influence of a number of factors, among which a responsible attitude to the environment, social responsibility and the quality of corporate governance have come out in the first place in recent years. The analysis proved that the ESG principles are firmly entrenched abroad, the number of companies with an ESG rating is growing exponentially, and their profitability is increasing. It has been stated that the Russian business has not yet included ESG principles as mandatory parameters of active investment strategies. The emphasis is put on the relationship with stakeholders, since it is the stakeholders who evaluate the company's activities from the standpoint of the degree of satisfaction of their needs. The conducted analysis has proved that an assessment includes not only profit maximization and dividend growth, but also the results of social and environmentally responsible practices of companies. It has been inferred that there is a relationship between the sustainable development of the company, its business reputation, the creation of ethical values and taking into account the interests of stakeholders in the company's strategy. It is emphasized that ESGs become an instrument of active investment strategies and a tool that determines the business reputation of the company. The practice of responsible ESG investment has been illustrated, the role of institutional investors in the dissemination of this practice has been highlighted.