eThesis - School of Business electronic theses

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OBJECTIVES OF THE STUDY The purpose of the thesis is to study a value investing method (i.e. Magic Formula) in the Finnish market. The aim is to find out, if the stocks that are ranked and chosen by this method actually have higher returns in the future than stocks on average. The main objective is to compare the returns of the value portfolios to benchmark index and to see if it can be outperformed. There are five other objectives that will be studied. First, is there a difference between the returns of top ranked stocks and the bottom ranked stocks. Second, what is the optimal holding period for the portfolio, and third, how many stocks should be chosen to maximize the returns. Fourth objective is to compare the volatility and the returns of the portfolios to market portfolio. Last objective is to study whether something is gained if one more factor is added to portfolio ranking.

DATA The data for this study consists of 50 to 124 companies, depending on the quarter, listed in Helsinki Stock Exchange between 2000 and 2009. Quarterly report and market data of 40 periods have been used to form two key ratios that are the basis for the stock ranking. All the other sectors except banking are included into the study, and companies are limited so that the minimum market capitalization is ten million. Also the companies that have delisted during the time period or have listed in the middle of the period are included.

FINDINGS The findings of this research prove that value premium does exist and the benchmark index can be outperformed. This confirms the results of previous literature. Unlike some other studies suggested, larger portfolios did not necessarily provide higher or more constant returns. In this study, the small portfolios that were based on Magic Formula performed better in shorter holding periods but as composite measure of Magic Formula and Price-to-Book was used, larger portfolios were better. The higher returns of value portfolios are often validated with increased risk. Based on this research the volatility was lower among value portfolios than it was for the index.