Portfolio allocation using power enhancement method
by Chengeng Qu
THESIS
2016
M.Phil. Information Systems, Business Statistics and Operations Management
ix, 33 pages : color illustrations ; 30 cm
Abstract
Big alpha equities are highly desirable in various financial applications. A Power
Enhancement Method can be used to detect big alpha stocks. In this paper, we aim at
analyzing the properties of big alpha stocks and building connections between detecting
such stocks and portfolio construction. Based on analysis of big alpha stocks, we propose
two distinct portfolio strategies. Our simple equally weighted portfolio is highly volatile
and could not achieve satisfactory performance, while our more sophisticated Markowitz
method-based portfolio manages to control risk, and outperforms both the S&P 500 and
our first strategy with lower risk, higher compound return and a higher Sharpe ratio.
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