Factor Investing on the Swedish Stock Market : A Quantitative Study of a Model Based on Quality and Value

• Main Authors: Adolfsson, Teodor, Domellöf, Henrik
• Format: Others
• Language: English
• Published: Umeå universitet, Företagsekonomi 2018
• Subjects: Factor Investing; Quality Factor; Value Factor; ROE; Earnings Yield; Efficient Market Hypothesis; Capital Asset Pricing Model; Swedish Stock Market; Business Administration; Företagsekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-149715

Investors and fund managers have, since the start of financial markets, always been on the lookout for new ways of beating the market. However, researchers of the Efficient Market Hypothesis have shown that markets are usually highly efficient, implying that there are few possibilities of earning returns that are higher than the market returns, on a risk adjusted basis. Prevailing theories, such as the Capital Asset Pricing Model, has shown that increased return must stem from taking on higher risk. Though, this model’s explanatory power has been challenged by numerous researchers who propose different factors, other than market risk, which could hold explanatory power when it comes to returns in the stock market. This area of research is called factor investing, and has shown that factors such as momentum, size, and value, all can lead to outperforming the market.This study examines how a model based on two common factors, quality and value, would have performed on the Swedish stock market. The study is based on five portfolios chosen by the quality and value factors, each one held for 5 years, examined over a 25-year time span and uses the capital asset pricing model as a tool to measure whether or not the selected factors outperform the market. The study has taken a quantitative approach to examining the research question, using a positivistic and objectivistic view.The results of the study show evidence that the quality and value factors can lead to significant outperformance relative to the market index. Both total returns and risk adjusted returns were higher than the market index for some of the portfolios created using the quality and value factors. Furthermore, statistical evidence was found of that CAPM not fully explains all returns, and thus, that the returns are in part explained by the quality and value factors. The findings led to the conclusion that the quality and value factors does, in fact, hold explanatory power beyond that of CAPM. Purchasing quality companies at a reasonable price is shown to be a sound investment strategy, and that a portfolio created using the quality and value factors has good chances of outperforming the market index.