A Sorting Strategy for Alpha Based on ROE Linked with Global Financial Market

DOI

10.2991/assehr.k.211209.369How to use a DOI?

Keywords

ROE; Carhart four-factor; alpha

Abstract

Finding sorting variables for alpha is crucial in investing stocks. The alpha, also referred to as abnormal return, measures the investment strategy’s ability to beat the market. It is the part of portfolio return that the existing model cannot explain. Return on equity (ROE) is one of the key factors to evaluate the performance of a corporation. Generally, higher ROE indicates the better profitability of the corporation. In this paper, the Carhart four-factor model is used to simulate alpha, and ROE is applied as a sorting variable. After analyzing quarterly corporate data from 1991 to 2020, this paper proposes a long-term investment strategy of buying stocks with 10% lowest ROE and selling stocks with 10% highest ROE. This strategy brings 1.477% abnormal return annually, which may provide some suggestions for investors.

Copyright

© 2021 The Authors. Published by Atlantis Press International B.V.

Open Access

This is an open access article under the CC BY-NC license.

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TY  - CONF
AU  - Shenkai Wu
PY  - 2021
DA  - 2021/12/15
TI  - A Sorting Strategy for Alpha Based on ROE Linked with Global Financial Market
BT  - Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)
PB  - Atlantis Press
SP  - 2250
EP  - 2254
SN  - 2352-5428
UR  - https://doi.org/10.2991/assehr.k.211209.369
DO  - 10.2991/assehr.k.211209.369
ID  - Wu2021
ER  -