Smart Beta Modelling : The Case for Cyclically Adjusted Price/Earnings Ratios
Schiller’s Cyclically Adjusted Price/Earnings Ratio (CAPE) has been used by financial economists to determine the direction of the stock market, up or down. In this study, we develop portfolio weighting models with CAPE as the weighting factor. We use two weighting decision rules: 1.) Higher weights are given to stocks with higher CAPE ratios and, 2.) Higher weights are given to stocks with lower CAPE ratios. The top ten stocks within the Consumer Discretionary, Consumer Staples, Industrials, Healthcare, and Information Technology sectors are used to test the alpha generating capability of the CAPE weighting factor. The returns for CAPE weighted portfolios are calculated for the years 2010-2016. The benchmark portfolio is the S&P 500 ETF SPY.
Tony S Caporale, Robert D Dean
Primary Advisor's Department
Economics and Finance
Stander Symposium poster
"Smart Beta Modelling : The Case for Cyclically Adjusted Price/Earnings Ratios" (2018). Stander Symposium Posters. 1162.