A Blindfolded Monkey as Portfolio Manager

Abstract: This study aims to investigate whether chance can beat an actively managed equity fund during a ten-year period on the Swedish stock market. Since the stock market consists of fierce competition among investors, the EMH would suggest that stock price movements should not be far from reflecting all available information. Due to the highly unexpected nature of new information, such as news, price fluctuations should follow a random walk. Therefore a highly competent investor, e.g. a fund manager, should not be able to consistently outperform an investor basing his investments on a blindfolded monkey throwing darts at a stock list. The result shows that, on average, randomly generated portfolios of stocks, annually rebalanced during a ten-year period, outperformed the mean fund in return as well as alpha. However, quite expectedly there’s a larger spread of the returns, entailing a larger standard deviation, yet there is a fairly similar Sharpe ratio in comparison to the funds.