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Efficiency and growth: an integrated analysis of portfolio optimization via a multi-factor model in the North American stock market
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This paper analyzes the performance of a long-short investment strategy across a 53-year sample
period, combining the Total Z-Score and Mean Variance Weight approaches. The Total Z-Score
assigns equal weight to Asset Turnover, ROA, and revenue growth, while the Mean Variance Weight
approach utilizes factor portfolios for optimal weight determination. The integrated approach
proves effective, with the Long-Short portfolio consistently outperforming benchmarks. Challenges
in long-short strategy implementation, including margin account requirements and transaction
costs, surfaced. Crucially, historical success doesn’t guarantee future results. Despite these
limitations, the strategy appears promising.
The group report seeks to combine five strategies from different regions and markets: the
Volatility Timing & Momentum (U.K. Market), the Value Premium (U.S. Market), the Efficiency
& Growth (U.S. Market), the Investor Sentiment & Volatility Timing (European Markets), and the
Carry & Momentum (FX Market). The Equal-weighted (EW), the Tangency (TP), and the Global
Minimum Variance (GMV) portfolios were created to combine the above-mentioned portfolios.
The EW portfolio showed the highest annualized return (6.26%), while the GMV had the lowest
volatility (3.20%). The TP has the highest Sharpe Ratio (1.263). All portfolios performed better
than the best individual strategy regarding risk-adjusted returns.
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Portfolio optimization Financial markets Sharpe ratio North American stock market Factor investing Fundamental analysis Efficiency Growth Asset allocation