Back Testing the "Magic Formula" in the Nordic Region

Detta är en D-uppsats från Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Sammanfattning: We will in this thesis back test Joel Greenblatt’s magic formula on stocks in the Nordic Region between January 1st 1998 and January 1st 2008. We will compare the return with benchmarks such as MSCI Nordic and S&P 500 as well as the return predicted by the Capital Assets Pricing Model (CAPM) and Fama French’s three factor model. The portfolio based on the formula had during the ten year period a compounded annual growth rate (CAGR) of 14.68 percent compared to 9.28 percent for the MSCI Nordic and 4.23 percent for the S&P 500. However, the intercept was not significant neither when testing against the CAPM or Fama French’s three factor model on the 5 percent level. Adding transaction cost lowers the CAGR to 11.98 percent. With transaction costs, the intercepts were not significant neither when testing against the CAPM or Fama French’s three factor model on the 5 percent level. The Sharpe ratio for the portfolio was above MSCI Nordic and S&P 500 both with and without transaction costs. We also find that the return of the portfolios improve when including intangible assets in the magic formula.

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