Monkey business : Can a portfolio with randomly selected shares beat the market?

Abstract: Actively managed mutual funds underperform the index and investors are recommended to invest in index funds since they give higher returns (Dagens Industri Debatt, 2010). In this thesis it is investigated if partly indexated portfolios with randomly selected stocks beat the benchmark index and thus are a valid option of portfolio construction for the individual investor. For this purpose sixteen portfolios are constructed partly by an index and partly by randomly selected stocks from the Swedish stock market in the time period of 2007.01.01 to 2010.01.01. Risk and return measures are used in order to analyse if the portfolios beat the benchmark index. The results are also compared to an index mutual fund in order to validate the results further. The results suggest that partly indexated portfolios with randomly selected stocks are able to outperform both the benchmark index and the comparing index mutual fund. When dividends were included in the portfolios all of the sixteen portfolios had beaten the benchmark index. The two stock portfolio is a valid alternative when investing in mutual funds since it has superior returns with only marginally higher risk than the benchmark index.