Abstract:
Portfolio selection has been a well-researched topic since the mid 1950Õs. Researchers such as Harry Markowitz obtained the Noble Prize for his work on portfolio selection. His model, which is underpinned by the concept that the market is efficient, has been the cornerstone of many investment strategies over the years.
Recently, however, many authors have claimed that the markets are inefficient, and that one cannot rely on a model that assumes a linear and static relationship between risk and reward, making the Markowitz Portfolio Selection Model (MPSM) obsolete.
Literature suggests that much of this inefficiency is created through the use of different styles; that is, styles in which shares are grouped together based on certain fundamental characteristics, to inform the investment strategies of investors.
Therefore, this study endeavours to supplement the MPSM with different investment styles. Firstly, testing whether the risk adjustment afforded by the MPSM is positively influenced by the different investment styles. Secondly, to determine which style achieves the highest returns over the selected period.
Monthly total return data from the JSE was used and portfolio rebalancing took place every six months for a period of 10 years. The share weightings of the portfolios were informed by risk adjusted style based predicted returns. The performance of these portfolios was subsequently compared.
Results indicated that style influenced portfolios outperform the non-style influenced MPSM, with some styles providing greater returns than others over the period selected.
