The browser you are using is not supported by this website. All versions of Internet Explorer are no longer supported, either by us or Microsoft (read more here: https://www.microsoft.com/en-us/microsoft-365/windows/end-of-ie-support).

Please use a modern browser to fully experience our website, such as the newest versions of Edge, Chrome, Firefox or Safari etc.

Value Investing and The Magic Formula - a method for successful stock investments

På svenska

Author

  • Andreas Goumas
  • Peter Källström

Summary, in English

With this thesis we want to prove that by using a single formula for picking stocks, Joel Greenblatt’s ‘’Magic Formula’’, it is possible to achieve returns higher than those achieved by a related index. To prove this, we will construct a portfolio, according to “The Magic Formula”, and backtest the portfolio in the Swedish stock market. The test period will be March 1999 to January 2010 and we will compare the results with indexes such as OMX SPI and OMX S30. In order to measure our portfolios performance in relation to the overall market and the risk taken, we will use Fama’s and French’s “Three Factor Model”, Sharpe-ratio and Treynor-ratio as measurements. When we tested the ‘’The Magic Formula’’ portfolio with Fama’s and French’s “Three Factor Model” during the period 1999 to 2007 we got an annual excess return of 14,1 %. Usually the excess return is explained as a coincidence, which we did not because of the size of the excess return as well as of the length of the period we made the observation. The Sharpe-ratio as well as the Treynor-ratio was 0,309 and 0,186 respectively, which was greater than the market portfolio (OMX SPI) that had a Sharpe-ratio of −0,008 and a Treynor-ratio of −0,004. We also found that by following “The Magic Formula’’ for 36 months the portfolio had a positive return for 83 percent of the 93 periods observed as the OMX SPI and OMX S30 had 50 percent and 46 percent respectively, of the 93 periods observed.

Publishing year

2010

Language

Swedish

Document type

Student publication for Bachelor's degree

Topic

  • Business and Economics

Keywords

  • Stock Market
  • Magic Formula
  • Joel Greenblatt
  • Value Investing

Supervisor

  • Hossein Asgharian (Professor)