The Performance of Gross-Profit to Asset on the Swedish Stock Market : A comparison to Book-to-Market and Earnings-to-Price in a time frame of 1994-2013

Abstract: This thesis examines the performance of portfolios sorted by gross-profit-to-asset (GPA) as a quality investing on the Swedish stock exchange. It constructs long-only portfolios and long-short portfolios sorted by GPA, book-to-market (B/P) and earnings-per-price (E/P). Thus, the thesis includes quality and value investing. The thesis compares separately the constructed long-only and long-short portfolios among each other. The long-only strategies are additionally compared to the market index. The study further examines a combined portfolio, sorting for GPA and B/P in order to test Novy-Marx’s findings. He reports, that the average return improves, while the standard deviation remains at the same level for a combined portfolio sorting for GPA and B/P. This requires a negative correlation. The comparison is based on different portfolio measurements as i.e. s.d. The asset pricing models CAPM and 5-Factor Model are applied. In addition, actual returns, excessive return over the risk-free rate and over the market index as a benchmark are assessed for the portfolio. The analysis is conducted for the time period 1994-2013 and separately for downturns, considering 2000-2003, 2007-2009 and 2010. The results show a great applicability of the gross-profitability ratio on the Swedish market. This quality strategy convinces not only during normal times with the portfolios GPA-h (long-only) and GPA-hl (long-short) but also in stressed times. GPA-h reports positive (abnormal) returns GPA-h during downturns. The long-only and long-short portfolios based on GPA outperform the market in both time periods. GPA-sorted portfolios perform in general better and the two value strategies during normal times and downturns, based on the annual average return. Examining the two value strategies EP-sorted portfolios are superior over BP-sorted portfolios. EP-portfolios achieve better performance during downturns, regarding Jensen’s alpha. It can be derived, that EP is countercyclical. The combined portfolio generates high return and has a high standard deviation. The assessed statement of Novy-Marx cannot be confirmed for the Swedish stock market. It has to be stated that we detected positive correlation instead of negative correlation. It can be derived, that GPA ratio is applicable on the Swedish market, considering the assumptions and limitations of this study. EP-based portfolios show a good performance during downturns. BP- based portfolios do not perform well on the sweidish market in the assessed time frame. The combined portfolio GPABP-hh does increase returns with constant standard deviation, referred to BP-h. Our findings show, that both value strategies do not outperform the market index. The EP-based value portfolios outperform BP-based portfolios. EP-h performs better during downturns considering Jensen’s alpha.