THE GOLDILOCKS STOCKS
A mélange of factors, composition, timing not too much, not too little - but just right.
(This is the bowl of porridge that would please Goldilocks, no less.)
5th revision : 03 June 2021
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A fairly recent, potentially promising, yet decisively fragmented area in investment research and financial literature gaining quite a bit of momentum is none other than the phenomenon of momentum. In light of the stubbornly dissonant literary landscape, the following investigation into momentum investing aims to further explore the its rather mind‐bottling effects on equities returns, the efficacy of melding it with a traditional ratio (value) strategy, and in particular, unavoidably so, its performance in the face of a big, disastrous global pandemic. A selection of influential factors is first assessed for individual and joint effects on average annual returns. Separate model portfolios for a ratio, ratio‐momentum mixed, and pure momentum strategy are subsequently backtested against the S&P 500 index fund. It is observed that the momentum factors remain significant with or without the pandemic, while value factors show up insignificant in both cases; however, momentum acted funny in the pandemic data. The test portfolios indicate that the mixed strategy yields excess returns over both the benchmark and the value strategy during the pandemic. While there is strong evidence of momentum efficacy and potential – especially with respect to the mixed strategy – it nonetheless remains sensible to conclude that more research is necessitated in this maze‐like field, particularly in regards to some observed shortfalls of the mixed strategy (e.g., entry‐exit timing, risk, etc.).
Keywords: momentum, investing, equities returns, past returns, value, market efficiency