Does Selected Portfolio Investment Earn Abnormal Returns?

Min (Shirley) Liu


Finance literature suggests that average returns on common stocks are associated with firm characteristics such as size, book-to-market ratio, and growth. In this paper, I evaluate the performance of the selected portfolio when comparing with the benchmark portfolio (e.g., a market index), and document the anomalies earned by the selected portfolio. However, after matching the selected and benchmark portfolios by size and book-to-market ratio, the selected portfolio underperforms the benchmark portfolio. The results for testing anomalies are mixed, which is consistent with the previous literature that “apparent anomalies can be due to research methodology, most long-term return anomalies tend to disappear with reasonable changes in technique” (Fama 1998). The results are robust to the usage of Fama and MacBeth regression method and nonparametric signed-rank test, indicating that the results are not likely due to random chance. 

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